Regardless of the quality of treatment that you provide a patient, you may nevertheless be sued for just about anything, however well-advised the course of treatment may have been.
Even the best physicians harbor an understandable fear of malpractice lawsuits. Regardless of the quality of treatment that you provide a patient, you may nevertheless be sued for just about anything, however well-advised the course of treatment may have been.
Even in the most innocent of situations, an aggressive plaintiff’s lawyer may be able to escalate damages to the point where your malpractice insurance company throws in the towel for the limit of the policy. For damages over that limit, you could end up facing personal liability.
The first step is to take financially protective measures as far in advance as possible. At the early stages of planning, when there are no claims pending, many solutions are applicable. As potential lawsuits arise or claims are made, however, solutions can become limited and options may be highly restricted.
To financially guard against this worst-case scenario, it’s a good idea to relegate assets to places where they may be legally protected from court judgments. No asset-protection measure should be regarded as a silver bullet, and the degree of protection involved in each may vary from state to state. But each is worthy of consideration with advice from a qualified attorney. Here’s a rundown:
- Annuities. These investments are purchased by handing over a lump sum of cash to the issuing financial institution. When the holder of one of these investments “annuitizes,” he or she receives an income stream for life. While the annuity itself can offer some protection against creditors, the income stream produced by annuitizing may offer a greater degree of insulation. (Guarantees are based on the claims-paying ability of the issuing company.)
- Cash value life insurance. Policy holders can access cash value, but civil judgments are typically impeded from doing so because this would mean an economic loss to beneficiaries. The greater the contribution in the policy, the more money can be accessed down the road or left to beneficiaries. Policy holders may want to wait to access a policy’s cash value - perhaps until after retiring, after concerns about potential malpractice lawsuits have long passed.
- Defined benefit plans. Assets in these plans have proved far less vulnerable to judgments than those contained in IRAs, Simplified Employee Pensions (SEPs), or Keoughs, so they offer more protection. These plans have obligations for payouts to the owner of a company and the owner’s employees, so they tend be less vulnerable to creditors. A 401(k) or a deferred-benefit plan can also offer wealth protection while ensuring tax-deferred wealth accumulation.
Own Nothing, Control Everything
Another way to protect personal assets is to use trusts. Trusts tend to be an effective shielding device because, when the creator transfers assets to a trust, he or she no long owns those assets; the trust does. The assets are less accessible to judgments because they’re held outside of your estate. The use of trusts illustrates a classic maxim regarding asset protection: “You want to be in a position to own nothing but control everything.”
One useful type of trust is irrevocable life insurance trust (ILIT). These trusts each contain a life insurance policy, the proceeds of which keep heirs from having to liquidate assets of the estate - for example, real estate - to pay taxes on the estate upon the death of the grantor (the creator who funds the trust).
Here’s how ILITs work: The grantor may legally gift up to $13,000 a year (or, if married, the couple may gift as much as $26,000 annually) to the trust without paying gift tax. The trust (not the grantor), purchases a life insurance policy on the grantor. Premiums are paid with the money gifted to the trust. When the grantor dies, the trust’s beneficiaries - typically, the children - don’t have to pay taxes on the proceeds of the insurance policy because it is held outside of the grantor’s estate. And all along, the grantor has removed from his or her estate the money gifted to the trust to pay the policy premiums.
Another benefit: Those who create these trusts can access their retirement accounts without feeling guilty about reducing the size of their estates. After all, the insurance policy held within the ILIT assures heirs of inheritance with limited estate tax.
A number of trust options should be explored. Depending on the situation and legacy goals, many generations of your family can benefit from trust planning.
Physicians should also consider measures to protect their homes. This is all the more necessary if your home is paid for, as the courts can only take possession of what you own. Those who are still making mortgage payments might consider resisting the temptation to pay off their mortgage loans prematurely. If your home comes under legal siege, your mortgage lender could be your ally in fighting such efforts. Regardless, there may be no benefit to paying off the mortgage early. Depending on the circumstances of your loan, doing so may actually be less advantageous than investing this money elsewhere.
It Takes a Team
Asset-protection strategies are complex and require the advice of specialized professionals, including your financial advisor, your practice attorney, an estate-planning attorney and, because of tax implications, your accountant. By using a multi-disciplinary team approach, you increase the chances of avoiding pitfalls.
A multidisciplinary approach by professionals working in your employ is the best way to make sure sufficient due diligence is performed - a principle that investors who lost billions with Bernie Madoff overlooked.
Devery “Rusty” Cagle, Founder and President of ASE Wealth Advisors in Greenville, SC, is a Certified Financial Planner (CFP), a Chartered Advisor in Philanthropy (CAP), and a Chartered Retirement Planning Counselor (CRPC). He specializes in strategies for preserving wealth, reducing tax burdens, and sustaining family legacies.