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- Financial Planner: Protect Yourself Against Malpractice Liability
- Coming & Going
Financial Planner: Protect Yourself Against Malpractice Liability
Strategies to reduce your risk and protect your assets.
By: David B. Mandell, JD, MBA
Most physicians have worried about malpractice liability at least once during their careers. While most physicians don’t dwell on the possibility that they will have liability, nearly all doctors would be wise to acknowledge the potential liability they face and take proper steps to protect against it. This short article will outline a few strategies for doing so.
The first and most obvious strategy to protect against malpractice liability is to reduce risk and practice the best medicine possible. This begins with a dedication to being the best physician you can be, developing your ongoing knowledge through education and CME, and maintaining a general approach to meeting the medical standard of care expected in your specialty.
Beyond this medicine-centered approach, physicians would be well-served to incorporate non-specialty specific risk management techniques in their practice. These include learning how both physicians and staff members can best communicate with patients, especially when dealing with difficult patients or bad outcomes. Physicians should also consider implementation of methods for handling protected health information (PHI), adhering to constantly changing HIPAA regulations, and managing risks of communication technology, from blogs and websites to texting and email. Many of these techniques are covered in the seventh edition of our CME monograph, Risk Management for the Practicing Physician, nationally certified for up to 5.0 hours of Category I CME credit. (You can get a free hardcopy or ebook in the special offer at the end of this article.)
Regardless of how many risk management courses a physician takes or how carefully they practice, mistakes will occur. Human error cannot be eliminated from the equation. Moreover, sometimes bad outcomes will occur even when all best practices were followed—and occasionally bad outcomes can lead to potential liability even if the physician believes he or she did nothing wrong. Certainly, we would all agree that our legal system is not perfect and predicting liability is not a perfect science.
Given this, many physicians have chosen to buttress their practice risk management with asset protection planning.
Asset protection planning has a simple goal: to position a client’s assets in such a way that makes it difficult, and in certain cases nearly impossible, for a potential future lawsuit plaintiff to gain access to them.
If a physician’s goal is to feel more secure and sleep better at night knowing that they will not lose what they have worked hard to build—then asset protection planning is an important part of the solution.
Asset Protection. A Matter of Degree. A fundamental concept physicians must understand about asset protection planning is that it is a discipline of degrees, not a black/white, vulnerable/protected analysis.
In fact, we use an asset protection rating system for a client’s overall situation: from –5 (totally vulnerable) to +5 (superior protection). The goal is to move as much of the physicians’ wealth as possible from the negative vulnerable positions to the higher positive protected positions—ideally, with as little cost and interruption as possible.
Practice Asset Protection. While the first priority of most physicians is to protect their personal assets, practice protection should not be overlooked. That is because any malpractice claim or employee claim (sexual harassment, wrongful termination, etc.) against any of the doctors threatens all the assets of the practice. In other words, if you are in a group practice, you are underwriting all of the acts and omissions of your partners, to the extent of your practice assets.
What are the most important practice assets? Certainly, your cash flow and income are most important. The good news is that the tools that protect your cash flow also typically help you save on income taxes and build retirement wealth. These include qualified retirement plans—such as defined benefit plans, 401(k)s and combination plans—non-qualified plans, captive insurance arrangements and more. More information on these topics is available in our books.
Other important practice assets include the practice real estate, if any, and valuable equipment. If your practice has valuable real estate or equipment, you may want to separate these assets from the main practice, using limited liability companies (LLCs) to lease them back to the main practice entity.
Personal Asset Protection. Personal asset protection encompasses shielding a physician’s home, retirement accounts, other investment accounts, second home or rental real estate, and valuable personal property.
We typically recommend leveraging your state’s exempt assets as a priority, because (1) they enjoy the highest +5 level of protection and (2) they involve no legal fees, state fees, accounting fees or gifting programs. In other words, you can own the exempt asset outright in your name, have access to any values and still have it 100 percent protected from lawsuits against you.
Each state law has assets that are absolutely exempt from creditor claims, thereby achieving a +5 status. Many states provide exemptions for qualified retirement plans and IRAs, cash within life insurance policies, annuities, and primary homes. Make sure you seek an asset protection expert to find out the exemptions in your state.
Beyond exempt assets, basic asset protection tools like family limited partnerships (FLPs) limited liability companies (LLCs), and certain types of trusts should be used.
FLPs and LLCs will provide good asset protection against future lawsuits, allow for maintenance of control by you (the client), and can provide income and estate tax benefits in certain situations. Specifically, these tools will usually keep a creditor outside the structure through charging order protections. These protections typically allow a 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 many types of trusts that also provide significant protection for physicians. These can range from life insurance trusts or charitable remainder trusts to grantor retained annuity trusts, domestic asset protection trusts, and more. Each type has its pros and cons, costs and benefits. We explore this topic further in our books and other articles.
Obviously, for all these legal tools, their asset protection benefits are reliant upon proper drafting of the documentation, proper maintenance and respect for formalities, and proper ownership arrangements. If all these are in place, the physician can enjoy solid asset protection for a relatively low cost.
The Value of Risk Reduction and Protection Planning
The practice of medicine has inherent lawsuit risks, primarily from medical malpractice. Risk management and asset protection planning go hand-in-hand to help physicians reduce their risk of liability and protect them, in case liability does occur.
To receive free hardcopies of Wealth Management Made Simple, Risk Management for the Practicing Physician and For Doctors Only, text AESMAG to 555-888, or visit www.ojmbookstore.com and enter promotional code AESMAG at checkout.
Disclosure: OJM Group, LLC. (“OJM”) is an SEC registered investment adviser with its principal place of business in the State of Ohio. SEC registration does not constitute an endorsement of OJM by the SEC nor does it indicate that OJM has attained a particular level of skill or ability. OJM and its representatives are in compliance with the current notice filing and registration requirements imposed upon registered investment advisers by those states in which OJM maintains clients. OJM may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. For information pertaining to the registration status of OJM, please contact OJM or refer to the Investment Adviser Public Disclosure web site www.adviserinfo.sec.gov.
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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.
David B. Mandell, JD, MBA
• Attorney, consultant, and author of more than a dozen books for doctors, including For Doctors Only and Risk Management for the Practicing Physician.
• Partner in the wealth management firm OJM Group (www.ojmgroup.com).
• He can be reached at 877-656-4362 or firstname.lastname@example.org.