Asset protection: What to do, how to do it

June 2, 2006

Take all the precautions necessary to safeguard your wealth beforeit's too late.

You work hard for the money, so it's only logical that you should want to protect it.

Although every physician's worst nightmare is being wiped out as a result of a medical malpractice judgment, that rarely happens (see "10 years in legal hell,"). Typically, these lawsuits are settled before they ever go to court, and even if a judgment is handed down, the damages are often capped at your policy's coverage limits.

More likely tugs-of-war over your assets involve nonmalpractice litigants (ex-spouses; business and investment partners; others alleging injuries related to a car accident, labor issue, or contractual dispute), the IRS or a bankruptcy court.

DON'T WAIT. If you think only multimillionaires have assets worthy of protection, think again. It's always prudent to separate your property from creditors and predators-before a possibility becomes a reality. "It'll be too late if you wait until after you're sued," says Edward R. Collins, president of Collins Wealth Management in Parsippany, NJ. "A transfer of property out of your name in response to a lawsuit as a way of sidestepping creditors may be interpreted as a fraudulent transfer."

DO SHIFT RISK TO AN INSURER. If you're insured to the fullest extent, your assets may go untouched. Aside from ample medical malpractice coverage, you should be insured against events such as death and disability, as well as have sufficient health and long-term-care coverage. A catastrophic injury could wipe you out and force you to declare bankruptcy, so protect yourself against this possibility-no matter how remote you feel it might be. "In addition, you'll need liability and property insurance against both personal and business losses," advises Collins. Consider an umbrella policy, too, which can provide $1 million or more of extra protection for a few hundred dollars a year.

DON'T TRANSFER TITLE TO YOUR SPOUSE. Yes, this may offer a degree of safety in some states where a creditor can liquidate jointly held property to satisfy a judgment against one spouse. But, in general, a title transfer will often not provide blanket protection. Courts respond to an intramarital title transfer the way bulls react to a waving red flag, and will scrutinize it carefully to make sure it wasn't done merely for the purpose of evading creditors. "In many circumstances, the very union between a husband and wife has been found sufficient to show fraud and nullify the transfer of property," says Collins.

Even if you make the transfer way in advance of a lawsuit, your spouse may not be insulated, leaving chinks in the armor you thought was impenetrable. "The court will look at substance over form," says asset protection attorney David B. Mandell, co-author of Wealth Protection MD: The Ultimate Financial Guide for 21st Century Physicians (Guardian Publishing, 2004). "Say a plaintiff is trying to get his hands on your practice assets that are in your spouse's name. If she wrote checks for business-related expenses, she may be deemed an implied officer and assets in her name alone could be vulnerable as well." Same goes when the asset in question is your house. If you live in the house and pay the bills to maintain it, the court may look past what it says on the deed and view you as a co-owner.

"Another consideration is that by transferring ownership of assets into someone else's name, you expose yourself to that individual's personal liabilities," cautions Collins. "Should your spouse be sued, your assets in her name could be at risk."