Most Americans believe all doctors are wealthy. Combining this perception with a litigious society -- and a mentality of passing the blame -- and physicians are a prime target for lawsuits. These asset-protection strategies can shield a physician's hard-earned wealth.
Most Americans believe all doctors are wealthy. Combining this perception with a litigious society and a mentality of passing the blame, and physicians are a prime target for lawsuits. As a result, it is a wise move for physicians to take the time to structure their wealth and utilize various strategies to protect their financial security.
Asset-protection planning protects a physician’s hard-earned wealth. It is the process of organizing one’s business and personal affairs in advance - “taking the chips off the table” - to reduce liability exposure. Beyond the first level of asset protection, which involves carrying appropriate property & casualty insurance (e.g. malpractice and personal excess “umbrella” coverage), there are other asset-protection strategies available. Here are a few good examples:
State Law Exemptions. Exemptions differ by state, but many states provide exemptions for life insurance cash value, annuities, retirement plans, a residence, college savings plans, disability insurance benefits and wage income. The state of Florida, for instance, protects 100 percent of equity in a resident’s home, provided that the property falls within certain acreage limits. Similarly, Arizona provides for protection of 100 percent of life insurance cash value.
Forms of Ownership. Some states, such as Massachusetts, permit married couples to own property in tenancy by the entirety. In most states where property may be owned in this manner, a creditor would need a judgment against both spouses to seize the asset held in tenancy by the entireties to satisfy its judgment.
Asset-Protection Trusts. An asset-protection trust is typically a “self-settled” trust, where the individual “settler” - who creates and funds the trust - remains a discretionary beneficiary of the trust. Under the laws of most states, these trusts are not effective asset-protection devices because a creditor could pierce the trust and reach its assets to the extent that the trustee could distribute assets to the settler. If, however, an asset-protection trust is created in certain states or offshore jurisdictions — such as Nevada, Delaware or Nevis – the settler may shield the assets from creditors.
Gifting Assets. Gifting cash or assets to a spouse, children or grandchildren is an effective asset-protection technique. This strategy is most effective when the “coast is clear” — that is before a doctor has creditor issues – to avoid violating fraudulent transfer laws. Some strategies for gifting substantial amounts of money and protecting wealth include: charitable lead annuities trusts, grantor retained annuity trusts and installment sales.
Note that it is is important to balance tax-planning and estate-planning with asset-protection techniques; while also making transfers prior to any claims. Consult your team of experts -- financial planners, attorneys and tax advisors -- before executing any of these strategies. The timing and the purposes of an asset-protection plan seem to be the determinative factors as to whether a plan will be considered ethically and legally appropriate.
Evan P. Welch, CFP, works with individuals, families and physicians, to help them achieve their financial objectives through a long-term relationship based on knowledgeable advice. His firm is located in Boxborough, Massachusetts. Welch can be reached at (978) 263-3336 x206.