Asset Protection Planning for Doctors – Methods and Strategies for Wealth Protection
Although this page is addressed specifically to doctors, other persons such as high net worth individuals, business owners and other professionals can also make use of the information contained below. Just imagine yourself in the place of a doctor.
Physicians put in long hours in residency and several years of study and specialization before they can practice medicine. However, these hurdles may pale in comparison to fighting a knock-down, drag-out legal battle. Physicians face the challenge of protecting their practice and assets from an increasingly litigious society. Perceived as ‘deep pocket’ defendants, physicians are often the target of predatory malpractice lawsuits mounted by scheming plaintiff’s attorneys. You worked hard to build your wealth, and a predatory personal injury comes along and tries to take away in one fell swoop using ‘lawfare’. Lawfare is the term used to describe using the courts to commence legal war against you, do legal combat and defeat someone using the litigation system, and then ‘legally’ seizing their assets. The fact that they may force someone to pay hundreds of thousands of dollars in attorney’s fees to defend themselves, and could very well impoverish you and your family, means absolutely nothing to the attorney suing you. Remember: this is what they do. And, they get 1/3 of what they collect from you.
Because much has now been written on the “litigation explosion” and so many professionals and business owners have directly experienced its impact, asset protection planning is becoming as common as wills and estate planning. This dramatic increase in interest in protecting assets has been spurred by the threats associated with the “litigation explosion”, including the widespread perception that professionals with any accumulated savings are easy and vulnerable targets for frivolous claims. To many outside observers, the outcome of every case appears random, with unpredictable jury verdicts and astronomical damage awards.
As would be expected, the increase in lawsuit awards and settlements is restricting the availability of liability insurance coverage for the physician, a traditional and popular “deep pocket” defendant; many malpractice insurers have simple withdrawn from the business. In some “high risk” states – those with a history of large malpractice jury awards – and for some “high risk” specialties, such as obstetrics, neurosurgery, emergency room medicine, and orthopedic surgery, insurance may be unavailable, inadequate, or prohibitively expensive. Even doctors with good coverage now are uncertain about future availability. The “malpractice insurance crisis” is colliding with the “litigation explosion” to form a disaster. As a result, physicians need to plan ahead to protect themselves, which is where asset-protection planning comes into play.
Asset protection planning is the specialty area of the law that addresses many of physicians’ most important concerns, including the best ways to organize one’s business and financial affairs to minimize liability and lawsuit risks, and the steps a physician can take to insure his or her accumulated wealth and future earnings are insulated and shielded against potential loss. What else is involved in the field of asset protection? Who needs it? What are the strategies used?
Why Doctors Are at Risk
In the US, business owners, with the exception of physicians and some other professionals, can shield themselves from personal liability for business risks. They do this through the appropriate use of corporations, limited liability companies, and/or limited partnerships.
Business can be conducted without exposing the personal assets of the owner (but for their owns acts of negligence or breach of contract, or indemnity agreements or personal guarantees) to the obligations incurred by the company. Generally, the owner’s risk is limited to the amount of capital invested in the business. For regular business owners, theoretically, the quantity of risk is known and accepted. An investment of $200,000 in a business implies a maximum loss of $200,000. Substantial asset protection planning is devoted to organizing and reorganizing business structures and advising clients how to take full legal advantage of the limited liability protection available through these entities.
The purpose of allowing limited liability is to encourage business formation, job growth, and economic prosperity. Many would not operate a business or make an investment if they could not quantify the potential loss. Without a fair measure of the dollars at risk, it would be impossible to make rational business decisions.
Ask yourself this question: Would you invest in a company if a stated percentage of the profits if you were required to provide an unlimited guarantee of losses, to the full extent of your net worth? Even though most people would agree this proposition doesn’t sound like such a good deal, that’s how a medical practice operates; you have no choice if you want to practice medicine. Physicians cannot legally limit their personal liability for claims against the practice, and there is unfortunately no business structure permitted in any state that protects a physician from the primary source of potential liability – lawsuits based on a claim of professional malpractice. For you see, malpractice is personal. And, medical practice is practiced personally and billed by the doctor. This is different than a corporation or LLC that manufactures and sells widgets. If the manufacturing company produces a widget that harms someone, it is unlikely the business owner will have any personal liability. But, if someone is harmed by the medical services, there is only one person who provided those services or supervised someone else in the practice who did. So, even if the doctor is incorporated, it is likely he will have personal liability.
Unlike other business owners, each profitable year of operation does not reduce a physician’s level of financial risk. In fact, the reverse is true. Every dollar saved becomes an additional investment in the practice. Young doctors just beginning their careers, with little or no savings, have the lowest level of risk. But with each passing year, savings are added and the amount at risk is increased. As assets continue to grow, prior to retirement, most other business owners have minimized their exposure, but the risk for a physician has increased to the highest level. With every patient and procedure, they are literally placing at risk everything they own on a successful outcome. The more they have, the larger the amount at risk.
Attempts to remedy this situation has been blocked by trial lawyers and their friends in the legislature. Each state has passed legislation allowing the creation of Limited Liability Companies for business owners. In every case, at the request of the trial lawyers, physicians and other professionals have been specifically excluded from the benefits of the law.
So, what can a doctor (or other professional, business owner and high net worth person do)?
Taken together, the steps below can shield the assets from frivolous and even valid claims. If you take certain steps, you will have the comfort of knowing that you have protected your assets. This allows you to devote more time to your patients, your livelihood, your family and your business.
The first step to take in order to protect yourself from these claims is to carry adequate malpractice and other insurance.
However, Doctors are realizing that insurance alone is not sufficient to protect their assets.
Step 2 involves the design, preparation and implementation of an asset protection plan addressing your individual situation.
There is no one-size-fits-all asset protection for physicians design. Each plan usually requires a different configuration of strategies from another. Beware of an advisor who tells you this is so.
Third, make full use of government-protected tax shelters such as pension plans, profit sharing plans, SEPs, SIMPLES and IRAs. These tax strategies also have powerful asset protection features.