At A Glance:
- All physicians should take steps to protect their personal and professional assets from potential liabilities.
- Physicians may need different levels of asset protection at different points in their careers.
- While state laws vary widely, state-exempt assets enjoy the highest levels of protection.
As an attorney and consultant to physicians for more than 2 decades, I have advised many doctors on asset protection, the art of shielding assets from unforeseen future liability. In this article, I hope to dispel some incorrect assumptions you may have and inform you of one of the fundamental facts of asset protection—that not all protective tactics and tools are equally effective. In fact, various tools offer varying levels of protection, each shielding assets to different degrees.
ASSET PROTECTION: A MATTER OF DEGREE
The most common misconception physicians have regarding asset protection is that an asset is either protected or not protected. Protection is not a binary system. Rather, some assets may be protected more or less than others.
An asset protection professional approaches a client with unprotected assets much in the same way that a physician approaches a patient seeking treatment for an ailment. The asset protection professional, like the physician, will first try to get the client to avoid bad habits. For a patient, bad habits may include smoking, drinking alcohol, or an unhealthy diet. For someone seeking asset protection, bad habits may include owning property in one’s own name, owning property jointly with a spouse, or operating any medical practice with business assets exposed.
Beyond curbing bad habits, asset protection professionals will try to structure clients’ assets so they have the best protection possible under the circumstances. Circumstances to consider include how much the physician wants to spend; how much an asset is worth; and the physician’s marital status, state of residence, and interest in estate planning. During this process, the asset protection professional is aware that each asset protection tool—similar to pharmacologic therapy options—has certain efficacy, costs, and benefits.
I use an asset protection rating system with a range from -5 (very vulnerable) to +5 (very protected). The goal of asset protection planning is not to move all of a client’s assets to a +5 position; that is not possible, even in states with the most protective laws. Still, too many physicians, including ophthalmologists, have too many of their personal or practice assets in negative positions on my scale. At a minimum, nearly all physicians ought to move the bulk of their personal and practice assets to positive positions.
HIGHEST LEVEL OF PROTECTION: EXEMPT ASSETS
When we meet with a new client, my team always begins by making sure he or she leverages the best +5 tools available: state and federally exempt assets. We recommend exempt assets first because they enjoy the highest level of protection and they involve no fees (eg, legal fees, state fees, accounting fees, gifting programs). This means that a physician can own an exempt asset outright in his or her name, have access to any value, and still have it 100% protected from the typical lawsuit against him or her. Each state outlines assets that are exempt from creditor claims, allowing the asset to achieve +5 status. Many states provide exemptions for qualified retirement plans and individual retirement accounts, cash within life insurance policies, annuities, and some value of equity in primary homes. Consult an asset protection expert to learn about the exemptions in your state. If protection is important to you, be sure to maximize these +5 tools.
IS JOINT OWNERSHIP AN OPTION? IT DEPENDS ON WHERE YOU LIVE
BRIDGING THE GAP: LEGAL TOOLS
Legal tools such as limited liability companies (LLCs), family limited partnerships (FLPs), and a variety of trusts are often used to bridge the gap between negative positions and +5 exempt assets (or tenancy by the entirety in limited circumstances, as described in the sidebar above).
FLPs and LLCs provide good asset protection against lawsuits, allow the client to maintain control, and may provide income and estate tax benefits in certain situations. These tools generally keep creditors outside the FLP/LLC structure by restricting a successful claimant to a charging order, or the right to distributions paid out of the FLP/LLC, not the assets inside the entity. These protections typically allow the physician to create enough of a hurdle against creditors to negotiate favorable settlements. For these reasons, we often call FLPs and LLCs the “building blocks” of a basic asset protection plan.
There are also many types of trusts that provide significant protection for clients, including life insurance trusts, charitable remainder trusts, grantor retained annuity trusts, and more. About a dozen states have passed statutes allowing domestic asset protection trusts (also known as DAPTs), which can be ideal trust protection tools for physicians in those states.
The strength of asset protection benefits depends on expert drafting of the documentation, routine maintenance, respect for formalities, and proper ownership arrangements. If all of these are in place, then the physician can enjoy solid asset protection at a relatively low cost.
Asset protection planning, like any sophisticated multidisciplinary effort, is one in which each tactic and strategy has relative pros and cons. When you undertake this task, be sure you are guided by an advisor who will use all available tools to give you the highest levels of protection with reasonable costs.