A typical physician often has conflicting financial goals. As an investor, he wants to maximize his investing returns. As a taxpayer, he wishes to reduce his taxes as much as possible. He realizes, of course, that the real goal is to maximize his after-tax return. The best way to minimize taxes is to lose money (rather than make it) on your investments. Likewise, some solutions that may provide the best asset protection may not be best for estate planning, tax planning, or investing. For example, you can provide some asset protection for your house by having it be owned by a family limited partnership. But you then lose the ability to deduct the mortgage interest on your taxes. There is no “one-size-fits-all” product that will best provide for all of these sometimes conflicting goals.
It is also important to realize that asset protection issues tend to be very state specific. For example, in Texas, there is an essentially unlimited homestead exemption. That means creditors can’t seize your house. So from an asset protection standpoint, you may be best off keeping your money in your house by buying a large house and paying down the mortgage.
Buying a big house, of course, may not be best from a saving/investing standpoint and may create all kinds of estate planning issues for you. In Tennessee, the homestead exemption can be as low as $7500. A physician in this state looking for asset protection may be better off keeping money in retirement plans like 401Ks and cash value life insurance and minimizing the amount of equity in his home. You can learn more about your state’s asset protection laws here.The first issue to address in any asset protection plan is to have adequate insurance. Have high liability limits on your auto, boat, and property insurance. Add an umbrella policy on top of those. Not only does this provide more protection for you from large claims, it also brings you the benefit of having the insurance company’s highly paid, experienced attorneys on your side. Carry an appropriate amount of malpractice insurance for the same reasons. Most of us worry about a malpractice suit ruining us financially. The truth is very few malpractice claims exceed the physician’s malpractice insurance policy limits, and those that do usually could have been settled for less than the policy limit. Malpractice suits and settlements are very unlikely to affect you financially. Don’t get me wrong, being sued for malpractice is likely to drastically affect your life and practice of medicine (especially if you get sued enough that you can’t get credentialed at a hospital or can’t get insurance at a reasonable rate.) But one or two suits are unlikely to have a significant financial on you. You’re much more likely to meet financial ruin from divorce, stupid, undiversified investments, and problems with your practice. Perhaps we ought to include such things as a prenuptial agreement in this section on insurance. Certainly, if you are getting married to someone after either of you has accumulated a significant amount of assets, you ought to get a prenup.
The second issue in any asset protection plan is to use your retirement plans. Most states protect 100% of your assets in 401Ks and IRAs from creditors. Not only does this help protect your assets, but it facilitates your estate planning, reduces your taxes, and maximizes your after-tax investing returns. Max out your retirement plans if at all possible, and certainly before worrying about all the intricacies of trusts and Nevada corporations.Third, be cognizant of the effects of how you title your assets. If you put the boat in your wife’s name, and someone sues you, they’re not going to get the boat. Of course, if your wife leaves you she’ll probably take the boat with her and you won’t have much of a claim on it. When you title a home, if you can, use “joint tenancy in the entirety.” This means that both you and your spouse own the entire house, so a creditor can’t force you to sell it to get your share of the money out. Of course, while this may provide some asset protection benefits, it may also complicate estate planning, especially if there is a complicated family situation (such as children from a previous marriage.)
Fourth,you need to have an asset protection plan in place before you need it. If you try to protect assets AFTER a claim against you arises, you’re almost surely not going to be successful. The statute of limitations for fraudulent transfers and conversions is generally about four years, so you need to set this stuff up at least that long before you need it.
Fifth, realize that some assets are dangerous. They should be separated from the rest of your assets as much as possible. For example, a rental property or a business opportunity should be placed inside a corporation, so that if there arises a claim, only the value of that property or business is subject to the claim, rather than all of your other assets. A limited liability corporation is often used for this purpose. A medical practice and an office building are both dangerous assets. In general, they should be owned by separate legal entities so a financial catastrophe affecting one won’t affect the assets held by the other. Other dangerous assets include boats, ATVs, snowmobiles etc. Cover them with a large umbrella insurance policy and/or have them owned by a limited liability corporation.
Last, when you have a significant amount of assets, you’ll need to meet with an appropriate professional (almost always an estate planning attorney or one who specializes in asset protection) to consider forming trusts, family limited partnerships, corporations etc. You probably don’t want to do this yourself or with some type of planner doing this on the side. You’ll have to pay the attorney on an hourly basis, and it will be costly, but worth it. You don’t need to do this the day you walk out of residency, of course. There’s usually plenty of time. Remember, no assets, no need for asset protection.
It doesn’t do you any good to work hard, save well, and invest wisely if you lose years of effort to one little suit. Protect what you have earned so it will be there for you when you need it. Future posts on asset protection will run from time to time on the blog.
What do you think? What is your asset protection plan? Comment below!
“Remember, no assets, no need for asset protection.”
Haven’t done the estate attorney thing yet. This line made me feel better, at least.
Just keep in mind it is possible to attach future earnings, so in a sense those are assets in certain circumstances.
Great website! What is a reasonable amount of umbrella coverage in relation to net worth? At what net worth should I consult an estate attorney? Thanks.
It’s not about relation to net worth, it’s about relation to the amount you’re being sued for. You need more than the judgment. No rule of thumb answer as to when to see an ASSET PROTECTION attorney. Remember an estate attorney and an asset protection attorney are not the same.
Do you know any umbrella insurance companies that would cover you in a malpractice lawsuit? My insurance company will not!
No. They don’t do that. Umbrella malpractice might be a product you can find out there somewhere though, but don’t expect it to be cheap like regular umbrella insurance.
What have you heard about Legally Mine asset protection services?
Yes.
It always makes me worry to see investments and asset protection schemes based out of Utah because there are so many scams here.
I don’t know that this is a scam, but I do think they have all the incentive in the world to use scare tactics to get you to purchase expensive asset protection schemes.
I’m a firm believer that the best asset protection techniques are cheap, easy, and straightforward- maxing out retirement accounts, buying umbrella/malpractice policies, titling your house properly etc. You certainly don’t need the services of a firm like Legally Mine until you’ve done all that and still have significant unprotected assets. Definitely caveat emptor territory.
Some stuff found online about Legally Mine:
Legally Mine on BBB (http://www.bbb.org/utah/business-reviews/legal-services-plans/legally-mine-llc-in-orem-ut-22270989/)
– 22 complaints
– “I signed up for the program on the contingency that my partner had to buy in & if not a full refund would occur. I called within two weeks to cancel the transaction and was told that it would be taken care of. After several months I started to receive a $500 payment. Over the last year and a half I have received about $1500 of refunds. I am told that they will pay it off but payments are sporadic and communication is non-existent.”
– “I attended a presentation by legally mine. At this presentation I decided to sign up for services offered by this company. I only signed up with them after being assured by the presenter that I would have the chance to cancel for a full refund within a couple of days if I desired. When I got home the same evening I talked to my wife about signing up with this company we decided to cancel the requested service. I cancelled the very next morning by going through the steps they requested. This included filling out forms and returning to them. I have not received any of the 5100.00 they charged to my credit card”
Legally Mine on RipoffReport (http://www.ripoffreport.com/r/Legally-Mine-LLC/Orem-Utah-84058/Legally-Mine-LLC-Dan-McNeff-Dishonest-worst-consumer-experience-in-my-lifetime-Orem-Uta-1066050)
o “I would not trust this company at all. My experience started 7 months ago with a presentation by the owner Dan McNeff, which was arranged through my trade association. As others have reported, they used the same line…”If you sign up now we’ll give you this special price and we can get your program completed by years end so you can receive your tax benefits. Years end came and went. The tax deadline came and went. Here I am 7 months later and if there’s the slightest hint of displeasure in your e-mail correspondance they ignore you cmpletely. Their attitude is is simply…sit down, shut up, and you’ll receive your documents when we’re ready to deliver them”
o Legally Mine then went and sued the guy who complained for $400,000: http://www.legallymine.us/wp-content/uploads/2015/04/Defamation-Complaint.pdf
TexasMedicine article on the pain of getting out of Legally Mine’s contract (https://www.texmed.org/Template.aspx?id=33741)
Powerpoint of presentation CEO of Legally Mine gave in 2011 (http://marylanddo.org/wp-content/uploads/2013/12/Extended-Legally-Mine-Presentation-1-19-11.pdf), and another from 2014 (http://amops.org/wp-content/uploads/2014/05/Legally-Mine-Presentation.pdf)
That being said, they seem to be prolific with their talks at medical conferences/professional associations (see here: https://goo.gl/48BXGy). I’d love to hear someone’s first-person experience or a blog post from Legally Mine so readers can comment directly.
What fun! Doing a review or taking a post from someone who has shown they’re not afraid to sue for defamation. That’s every blog owner’s dream.
Seriously though, I agree it would be interesting. The guest post policy is found here:
https://www.whitecoatinvestor.com/contact/guest-post-policy/
Went to an asset protection meeting with Legally Mine. They were using a bunch of scare tactics to try to get us to jump on ship. We want to do our home work and decided to pass on their “once in a lifetime deal”
With that being said. When is a good time to start purchasing and own different LLc and Flp is it before your dept free and only own 2 beat up cars and are renting or after you own a house.
No sense in buying an expensive asset protection plan until you have assets that aren’t protected by cheap, simple ones.
Very accurate and well-written post. I agree especially on the need to protect assets before the threat to the assets arises (i.e., before the alleged injury or alleged event of malpractice), the utility of insurance as a first-line of defense, and the separation and containment of liabilities by separate and distinct entities like LLCs and FLPs.
I respectfully disagree that the mortgage interest deduction is lost when a personal residence is placed into an FLP. (And, similarly, the exemption from capital gains tax upon sale of the home is also not lost.)
To the point that retirement plans offer asset protection, that is true, and I would also expand the category of “exempt assets” (i.e., assets exempt from attachment by creditors) to also include annuity policies and insurance policies and, sometimes, educational savings plans. These are not absolute exemptions and often depend on the policies/plans and state law, a theme also noted in the original post.
To the point that in a state with a large homestead exemption (e.g., Texas, Florida), it may make sense to pay down a mortgage, an interesting corollary is that mortgages can be excellent from an asset protection point of view while being less positive from a balance sheet point of view. This is because a creditor will be less inclined to seize a house where most of the equity is encumbered to a mortgage lender who will have to be paid off first and then whatever remains may be paid to the creditor (less legal and other costs).
As noted, the best asset protection is prophylactic and preemptive, i.e., before the threat arises, rather than defensive and after-the-fact, and undertaken in connection with a comprehensive estate and tax plan.
Asher-
Why don’t you send me a guest post on FLPs? I think it would be well received. Guidelines can be found here:
https://www.whitecoatinvestor.com/contact/guest-post-policy/
Any comment on whether an individual 401k (sole proprietor) is protected from non-bankruptcy lawsuits? I am a physician in Washington state, if that matters. My main concern is rolling over all of my TIRA funds into my individual 401k for the purposes of doing a Backdoor roth contribution, but exposing all of my retirement income to possible lawsuits. I do have malpractice insurance and umbrella insurance.
What do you mean “non-bankruptcy lawsuits”? I’m not sure you understand how asset protection works. The idea is that, if in the rare case you have a judgment above policy limits that isn’t reduced on appeal, you threaten to file for bankruptcy. Then you walk away with whatever is protected in bankruptcy- maybe some home equity, probably some retirement accounts, and whatever else might be protected.
In many states, 401(k)s have better asset protection than IRAs, so I can’t think of an asset protection reason NOT to do what you’re proposing. Plus, then you get more of your savings into Backdoor Roth IRAs, which usually have better protection than taxable accounts.
Thanks for the quick reply. You’re right, I may be misunderstanding how asset protection works. I have read from several sources that an individual 401k (sole proprietor) is not subject to ERISA, and therefore may not be protected in the event of a lawsuit. For example: http://www.wealthmanagement.com/retirement-planning/creditor-protection-retirement-accounts
Depends on the state. There are states where an individual 401(k) receives less protection than a “regular 401(k)” but it should never be less protection than an IRA.
So how do I find a reliable asset protection company? or attorney? I’m in Vega and we have a very litiginous population and no cap…
Seniorsdoc, I would be pleased to speak with you about asset protection. My bio contains my contact information.
http://letmegooglethat.com/?q=asset+protection+attorney+las+vegas
Seriously, like with any other professional, I’d interview 3 and choose the one you like best. I think about this every time I drive down I-15 on my way to Red Rock to go climbing.
I’m an MS4 with a -200K net worth. I rent an apartment with my wife and we have minimal assets. Do I really need an umbrella policy to protect my future earnings? Or will adequate car and renters insurance policies be plenty?
You only need it if you get sued for more than your car/rental liability covers. I’m not sure you understand what a target that MD is, even if you are worse than broke.
I probably don’t. Would you recommend a 1 million dollar policy on my car insurance and another 1 million umbrella insurance?
No, what is typically done is raise the car liability to $300K and stack the umbrella on top of that. I’d certainly have it by the time I left residency but it’s probably not a bad idea to get it during residency honestly. It should be only a few hundred dollars.
Great. Thank you for the advice. I think I can afford it. I got a quote from USAA and it would only be about 12 dollars per month.