By Dr. James M. Dahle, WCI Founder
When I first started blogging at The White Coat Investor, I thought I'd be writing frequently about asset protection. It was one of the five or six main topics on the blog. Then I discovered the truth about asset protection that most doctors don't know: it's incredibly rare to lose personal assets in a malpractice lawsuit. Being a risk-taker by nature, I quit worrying all that much about it, especially when I realized the majority of my net worth at the time was in retirement accounts that had excellent asset protection from my potential creditors.
I've still written about asset protection from time to time on the blog, and I speak about it all the time because docs are so interested in it. It's in the WCI Online Course, and there have been several podcasts dedicated to it. My keynote at WCICON in Las Vegas was entirely on asset protection. If you're not up to speed on the basics of asset protection, start with these posts:
- Introduction to Asset Protection
- Top 16 Asset Protection Moves for Doctors
- 20 Things You Need to Know About Asset Protection
Today, however, we're not going to talk about the nuts and bolts of asset protection. We're going to talk about the ethics of asset protection.
“Ethics? What ethical considerations could there possibly be?” you say.
Well, you're going to find out.
Asset Protection “Is Against the Law”
U.S. law is monolithic, or unified, under the U.S. Supreme Court. The court does not like it when you try to use one law (such as LLC law) to get out of the results of another law (such as a law against negligence.) Or if you try to use the laws of one state against a judgment in another state. Yet this is inherently what asset protection law is all about. So in this respect, asset protection is inherently against the law.
You Should Pay What You Owe
Most of us would agree that if we borrow money from a bank or our brother-in-law, we should pay the money back. So why do we think that we should not pay someone that we owe money to as a result of the judgment of a legitimate court, at least once all appeal options have been exhausted? The court has determined that YOUR actions resulted in harm to someone else. Why are you trying to get out of paying them?
You don't feel it is fair that you should lose everything for one mistake? Well, who gets to determine what is fair if not a dispassionate, professional court interpreting the laws passed by hundreds of government officials elected by hundreds of millions of your fellow citizens?
I Understand the Risk
Don't get me wrong, I certainly understand the financial difficulties that a sudden seven-figure judgment can cause on your personal financial situation. These sorts of financial risks are the perfect candidates to be insured—and insured well—against. If I hurt someone, I certainly want to make them whole as best I can, and insurance helps me to do that. But when you start going beyond that, it's time to start considering the ethics of not paying somebody money that you owe them.
Now, the laws of our country do provide significant protections against unlimited liability above and beyond the protection you would get from a reasonably sized liability insurance policy. For example, you can declare bankruptcy and wipe out the debts against you. In general, doing so also causes you to lose a lot of your assets, but both federal and state laws have exempted some of your assets from loss in those situations. For example, you generally get to keep your retirement accounts and, depending on the state, often get to keep a significant chunk of home equity, cash value life insurance, and annuities. These bankruptcy laws, of course, vary by state. Is that fair? Is it fair that a bankrupt Texan gets to keep his house while a bankrupt Utahn loses his for the same liability? Maybe not. But it's quite an ethical dilemma, isn't it?
But What About You and Your Family?
Is it ethical to not protect what belongs to you and your family? To take something that could help your spouse and children and “give” it to somebody else by not doing “proper asset protection”? Isn't your obligation to your children greater than your obligation to your patients or other creditors? Only you can answer that, but don't forget about that oath you swore on graduation day. Didn't it say you would put your patients' needs before your own?
“I will do no harm or injustice to [my patients].”
Is not paying them money when you harm them through your negligence “injustice”? Ethical dilemmas abound.
Concealment
Some asset protection schemes rely on hiding your assets from others. This is done primarily in the hope that they won't sue you in the first place because neither they nor their lawyers think you are worth suing. But once they get past that, you're required to reveal your assets to the court. At that point, concealing them is against the law and unethical.
Protecting the Innocent
Many asset protection schemes consist of mingling the assets of the guilty with the assets of the innocent. For example, if you are sued and forced into bankruptcy but you and I own a rental property together, why should I have to lose my share of that property? That's not fair. But in reality, these schemes violate the spirit of the law by protecting the guilty using the assets of the innocent. More and more ethical dilemmas.
Paranoia
John T. Reed provides an excellent discussion of the ethics of asset protection in his highly-recommended book, Aggressive Tax Avoidance for Real Estate Investors. I'm going to quote a few paragraphs:
“Structuring one's affairs in complex forms seems to be a sort of Rorschach test. Some people are congenitally attracted to that sort of thing. If you put them in charge of a Girl Scout Cookie drive, they'd form a corporation for each box.
They see this as very clever and evidence that they are really shrewd. I met a lot of these people at a privacy-oriented convention where I was a speaker once. It seemed to be an end in itself to them.
One wanted me to tell him how to own real estate so that no one could ever know he owned it. I asked him . . . why he didn't want anyone to know? He just gave me a bunch of sly winks and generally behaved as if everybody knew the answer to that question.
This sort of paranoia or playing secret agent or whatever psychiatric term describes it, is costly to set up and costlier to change. It may well be dead wrong if your life goes in certain directions that are especially disadvantageous for that ownership form. And it makes any honest men who are doing it look shady.”
I had a clinical partner once who did this sort of thing. He had a complex formulation of LLCs and family limited partnerships owning various assets and entities. I never could quite figure out why he was doing it. Looking back, it's funny because I don't think he had much to protect anyway, and it seems a significant part of what he did have was being frittered away on the cost of the structures.
Conflicts of Interest
Perhaps the biggest ethical dilemma in asset protection comes from its practitioners, primarily attorneys but also insurance agents. They want to sell you complex trusts, LLCs, and insurance policies. The first law of sales is to create a need in the minds of your potential customers. How do you do that if you peddle asset protection products and advice? By scaring potential clients into thinking that they're going to lose everything. So they overhype any new asset protection-related laws and especially any new asset protection schemes. They publicize the rare but impressive above-policy-limits judgments out there, even if they are later reduced to policy limits on appeal, as they often are. These folks speak to groups of doctors all the time, often at legitimate medical conferences. I can tell when they do it because the next day I have two or three emails in my inbox asking what I think about their company or the ideas presented.
Like with anywhere else in the financial services industry, tread carefully and carry a general skepticism. Become financially literate, consider your risks carefully, and map out a reasonable plan to deal with them.
However, when you start getting into complex asset protection techniques, at least step back for a minute and ask yourself if you really want to spend dozens of hours and thousands of dollars to screw somebody else out of money that a legitimate court says you owe them.
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? Are there ethical issues in asset protection? Have they affected your asset protection plan? Should they? Why or why not? Comment below!
My perspective is that the result of many judgments is not a fair assessment based on an overall fair system, nor based on the wisdom our fair and just elected officials. In fact I would say many of these judgments are simply based on the skill of individual attorneys. I can tell you I would do everything in my power legal and otherwise to avoid such a judgment, to quote unquote weasel out of what I owed if I felt the judgement was unfair. (Who gets you decide? I get too decide if it’s within my power to) I think I can rest my case simply by virtue of hundreds of lawsuit verdicts addressing the same mistake being awarded a range of $100,000 to 5 or 6 million. Which one was fair? The ethics would not even once enter my mind …
Your perspective is VERY commonly held (including in my own mind). This post is about presenting a contrarian perspective and one I think worth thinking about as you implement your asset protection plan.
My problem with Kenneth’s reasoning is that it doesn’t pass the “shoe on the other foot” test. If a patient or malpractice attorney came on here and said the exact same thing, it would sound like this:
“I can tell you I would do everything in my power, legal and otherwise, to squeeze every last dollar out of the defendant/doctor, to quote unquote cheat them out of what I wanted if I felt the settlement offer was unfair. Who gets to decide? I get to decide if it’s within my power to…. The ethics would not even once enter my mind …”
Yeesh, that sounds pretty bad doesn’t it? (Yeah, there are people out there like that but that doesn’t mean it’s a respectable viewpoint.) The problem is that we all are used to seeing things from our own perspectives, and responding to the incentives that are given to us. Doctors are far more likely to be on the defendant side of the courtroom, and so are naturally going to tend to have a biased view of what a “fair” judgment means, and what asset protection is ethically-justified. Those on the other side tend to have the opposite bias.
I would argue, a big part of ethics in general is having the ability to step out of your own perspective and look at the system from outside, as a whole. What is a fair judgment for someone who loses an arm due to malpractice? A leg? Eyes? Genitals? etc. I would challenge anyone reading this to look at some malpractice judgments and decide whether you would be willing to be afflicted with whatever injury was at-issue for the value of the judgment. Would you be willing to become paraplegic for $5M? I sure wouldn’t. Ethically it may not be exactly the same before-the-fact but it still puts it in perspective.
Of course, none of us have total control of the system that we operate in. There are major problems with the justice system, like the fairness of different people having access to hugely different levels of lawyer skill, juries who lack the training necessary to evaluate cases (and maybe even basic critical thinking skills), etc. I like the Hobbesian perspective, which is to (a) operate within the system as it exists today, but (b) be willing to work with others and improve the system when the chance presents itself. What would that look like in this context? Maybe, putting the cost of an asset protection trust instead toward buying more liability insurance? Voting for politicians who want to create a more objectively fair justice system, instead of the one who’ll make it more biased toward your side? Maybe we need more standardized judgment amounts for different types of injuries, like we have sentencing guidelines in criminal law? These are the kinds of questions that a real discussion of ethics would address.
Around here many lawyers are quite aggressive in advertising. This is my problem there are large ethical issues when lawyers get rich while suing. Sure I would want to help a person who I injured, but not his lawyer and not to make them rich. Fortunately I don’t have much opportunities to harm others.
Hide your assets!
I’m being accused of child sexual abuse during a routine physical exam, but I did not do anything inappropriate. I now face a civil lawsuit and should I lose because the political climate does not favor doctors, I will lose almost everything!!
Yes, hide your assets
So sorry to hear about your situation, and a risk that malpractice insurance does not cover. Interesting that you are facing a civil lawsuit rather than criminal charges. Probably because they figure there’s a better chance of winning.
When this is all over, consider submitting a guest post about it, even an anonymous one.
https://www.whitecoatinvestor.com/contact/guest-post-policy/
There’s something to be said for some of these arguments, but I think it goes a bridge too far, perhaps intentionally so. The article touches on the inherent unfairness of tort law across the US, but only a passing glance, and I think that’s where most people are coming from. There’s so much bias in the legal system, and why most lawsuits are settled; not because it’s an indefensible case, but because insurance companies and hospitals aren’t willing to throw their money to the whims of 12 random strangers with no medical training or experience to truly understand the issues. Not to mention the expense it takes to fight it. The law itself is also not inherently just; there’s nothing more or less ethical about living in a state with malpractice reform vs. not. Or practicing in a country where frivolous lawsuits are rewarded. Is it ethical to have a system that works that way? Is it ethical to require so much insurance in the first place, and the price it costs our entire society? Not to mention the profit being raked in by attorneys and insurance companies using that system to make money; is that ethical? If we’re going to have a conversation about the ethics of protecting your family’s future, I think we have to talk about the ethics of all of it.
Sure, stashing cash overseas or in Nevada nominee corps to hide it from predatory personal injury attorneys is sketchy, but so are a lot of lawsuits. The idea that every judgement is inherently just, fair, and is ethically owed is at odds with the real world in which we live. Most people in the world are good and honest, but there are a lot of bad actors out there as well willing to lie, cheat, and exaggerate to make a quick buck not ethically owed.
But it’s true, with reasonable insurance covering events inside and outside of medicine most people can sleep well at night. Part of the predatory nature of personal injury is that attorneys are out to make a quick buck, which means taking on as many cases as possible and seeking a quick insurance settlement. This is from knowing some personally. Going after assets above policy limits is expensive, time consuming, and often not worth it. Much easier to just take what’s offered and move on to the next 3 cases. Ethics though…it’s all a horribly swampy industry and I don’t find anything unethical about putting on some reasonable waterproof clothing. Saving in protected retirement accounts is one thing as you mentioned…but oh, wait, using your logic isn’t that unethical too if there’s a rightful judgement against you to make a plaintiff whole? Having money saved they can’t access? Just saying ;).
Excellent arguments. Thank you for presenting the other side of this coin so eloquently.
I found this article disappointing. Much like the “money is fungible” argument, saving any amount of money in any sort of account that enjoys creditor protection all but destroys the moral positions taken in this article. If the moral thing to do is have money available to pay those you harm, then you shouldn’t put anything in a 401k. You shouldn’t have an LLC at all, as the sole purpose of an LLC is to limit liability. I doubt the author is recommending doctors avoid 401ks and LLCs so this is mostly a half-assed attempt at appealing to peoples’ sense of right and wrong.
In my opinion, this would have been a much stronger piece if it talked more about the probabilities of not needing asset protection rather than giving what seems to be unearned credit to a justice system that, in its current form and function, is ripe for abuse.
Thanks for the feedback. The criticism is valid. It’s a dilemma for sure.
There are other articles on the site (and an upcoming book) that go into those issues much, much more deeply.
There are valid tax reasons for contributing to a 401(k) or operating as an LLC that have nothing to do with asset protection (in those instances the added asset protection is merely a secondary benefit and not the primary motivation). If the primary motivation is merely asset protection, then you have to start asking yourself whether the associated costs would be better spent to increase your insurance policy limits (which both protects your assets and serves to compensate those you may harm).
There are competing factors that have to be balanced. The pendulum shouldn’t be too far in the direction of the plaintiff, or the defendant. We shouldn’t want to live in a world where anyone can he hit with a huge judgment for a minor injury, or no injury at all. We also shouldn’t want to live in a world where the wealthy are able to completely insulate themselves from all responsibility. There are good reasons why the government offers asset protection benefits to a 401k, mostly that (a) the money is meant to cover your expenses and let you maintain a reasonable standard of living when you’re too old to work, and (b) to incentivize people to save for their own retirements, rather than become destitute and have the government need to step in. Likewise, LLCs are meant to incentivize risk-taking when starting a business, because (theoretically at least) only the business’s assets are vulnerable to the business’s creditors. This incentive is supposed to be in the public good, and I would agree it is, at least when the system is not abused.
Even in a serious personal injury/malpractice case, it’s arguably a better balance of interests to have the plaintiff get the $3M insurance payout, then to get $4M which includes the defendant’s $1M 401k, wiping him/her to zero close to retirement age. That’s very different from saying that you should be able to negligently render someone unable to walk/have kids/whatever and face no consequences because all assets are in a cook island trust. There are major problems with the justice system in the US, on both civil and criminal sides, and I am 1000% with you on needing to improve it. But if the alternative proposed is that defendants are able to protect all their assets from collection, and even after a jury trial can decide unilaterally whether the judgment against them is “valid” and how much to pay (if anything) I’m not sure that’s an improvement.
“Introduction to Asset Protection” and “20 Things You Need to Know About Asset Protection” both appear to hyperlink to https://www.whitecoatinvestor.com/asset-protection/. Is this intentional?
Lots of people missed the fact that there are ethical dilemmas on both sides of this issue. Yes, you have an obligation to anyone you hurt (and hopefully the insurance you’ve been paying for takes care of them adequately), but you also have an obligation to yourself, your family, your patients, and even your favorite charities to protect your assets and livelihood from outrageous lawsuits.
At any rate, I think the ratio of “this article sucks” to “I hadn’t thought of that” is running about 20:1 on this one. You can see even more examples on the WCI forum: https://forum.whitecoatinvestor.com/general-welcome/298806-discuss-latest-wci-blog-post-the-ethics-of-asset-protection
It was a worthy attempt… haha
I think asset protection only becomes unethical if you are dealt a verdict that you agree with… and yet still try to avoid paying. I mean, an asset protection plan doesn’t force you to underpay your creditor… it just gives you the option.
In fact, the ethics of asset protection (ie. legally decreasing your payment in case of lawsuit) is the same as the ethics of tax planning (ie. legally decreasing your payment of taxes).
Via email:
I am very happy to have discovered your content. Your article on the ethics of asset protection is very meaningful to me and I appreciate you writing it. I strongly agree with what you wrote and strongly feel doctors get suckered into worrying about going bankrupt from an unusual judgement. Your articles have helped calm my mind about this point of view and I feel like you are incredibly fair and apolitical about these topics. I love how well researched your topics are.
Your website is a breath of fresh air in a land of polarized, fear mongering news sites.
Your financial advice has been incredibly helpful as a new attending as well. I recommend your website to every doctor I meet.
Via email:
Interesting blog topic and points here. I’m not conceding there aren’t any and perhaps the majority are, but I think one portion to discuss here is the concept of legitimate court. I personally feel like the tort system in America and plaintiff’s attorneys have some imbalances. I can only really reference my state of FL but there is data currently related to home insurance litigation showing firms being awarded multiple times more than the client. Judges are awarding fee multipliers in fairly common legal cases. So I can understand right or wrong why a doctor that does exhaust him/herself so much and put so much effort into a medical career feels like the plaintiff system is looking for any opportunity to attack and isn’t sure if the legal process will come to a “legitimate” decision, or how legitimate associated costs may be. This can create a sort of jaded resolve I’d guess and in the worst situations an adversarial tension even between provider and client/patient.
There are complex ethical issues on both sides for sure. There’s a lot of grey area, but I do think it’s clear that there’s a big positive ethical value in maintaining robust high-limit malpractice and personal umbrella insurance (not to mention it tends to have a much better cost/benefit than more complex techniques). That scene from Erin Brockovich comes to mind where she’s negotiating a settlement with the opposing counsel, and asks them to tell her how much they would have to be paid to lose their {uterus, spine, legs, etc}, then multiply that by the number of plaintiffs in the class action, and that’s where they should start negotiating.
As an attorney/PI litigator for 25 years, I want to emphasize how true FrugalMD’s statement is: “Going after assets above policy limits is expensive, time consuming, and often not worth it. Much easier to just take what’s offered and move on to the next 3 cases.”
It is a VERY exceptional case where a personal injury attorney will not accept an offer of a $1 million policy limit from a physician, at least eventually, especially when they can still pursue an equipment manufacturer with a $10 million liability insurance policy, or a hospital with a $5 million liability policy, or other MDs involved in the case who also have a $ 1 million policies. Many malpractice attorneys in my home state of Texas now advise their physician clients to not carry more than $1 million in malpractice insurance, because a higher limit causes that person to become a “target” Defendant, in other words, the person whose acts or omissions are emphasized in order to increase the amount of liability placed on that person, and therefore drive up the settlement value of the case against that person.
This is an excellent and balanced article. Most (I believe 99.9%+) of physicians who carry at least $1 million in professional liability insurance will never have anything to worry about protecting assets because of a judgment in excess of policy limits. Even in the EXTREMELY rare case (less than .1% of cases result in a judgment against a physician in excess of policy limits), an acceptable settlement can almost always be reached that is a fair result.
My advice: carry $1 million in professional liability insurance and don’t waste your money on asset protection schemes. Spend the money contributing to your 401(k), IRA’s and ROTH IRAs, and your kids’ 529 educational accounts instead.