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.
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.
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.
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!