As an attorney and consultant to physicians for more than two decades, I have advised many on the area of asset protection—how to shield assets from unforeseen future liability. Ahead, I hope to dispel some incorrect assumptions you may have and provide you with one of the most important fundamentals of this field: protective tactics and tools are not all the same. In fact, each can offer varying levels of protection—shielding assets to a certain degree.
Improving Level of Asset Protection: Changing Bad Habits
The most common misconception that physicians have regarding asset protection is to think that an asset is either “protected” or “not protected.” In this endeavor, an asset protection professional approaches a client with unprotected assets much in the way that a physician approaches a patient. Like physicians, asset protection professionals will first try to get a client to avoid bad habits. For a medical patient, bad habits might mean smoking, drinking too much, or a poor diet. From an asset protection standpoint, bad habits might include owning property in a physician’s own name, owning it jointly with a spouse, or operating any medical practice with business assets exposed.
Beyond bad habits, we try to structure a client’s assets so they have the best protection that’s reasonably possible under the circumstances, which can range from how much the client wants to spend, how much the asset is worth, the client’s marital status, state of residence, and interest in estate planning. Guiding us along this process is the knowledge that each asset protection tool, like any medicine, has certain efficacy and costs/benefits.
For the past 20 years, I have used an asset protection rating system ranging from –5 (totally vulnerable) to +5 (highest level of protection). The goal of asset protecting planning is not to move all the client’s assets to a +5 position—this simply is not possible, even in the states that have the most protective laws. On the other hand, too many physicians have too many of their personal or practice assets in negative positions with little or no shield. At a minimum, nearly all physicians would do well to move the bulk of their personal and practice assets to positive positions.
Highest Level of Protection: Exempt Assets
We always begin by making sure clients leverage the best +5 tools at their disposal—state and federally exempt assets. We recommend exempt assets first 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 the typical lawsuit against you. Each state law has assets that are 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. Consult an asset protection expert to find out the exemptions in your state; and, if protection is important to you, be sure to maximize these +5 tools.
Joint Ownership Forms: Top Protection for Some Assets Against Some Creditors in Some States
In about 20 states, there exists an ownership form that can provide +5 level of protection in certain circumstances. Tenancy by the entirety (“TBE”), a form of joint ownership available to married couples in such states, may provide the top level of protection for claims against only one spouse. In some states, this protection applies only to real estate owned by TBE; in other states, both real property and personal property, like investment accounts, can be shielded through TBE.
However, inherent in TBE are several risks, including the fact that TBE never provides any protection against joint risks (such as lawsuits that arise from jointly-owned real estate and potentially car accidents) and all protections are lost in the event of a divorce. For this reason, even in states where TBE can be protective, we often recommend that it be combined with legal tools such as those described below.
Bridging the Gap: Legal Tools
Legal tools, such as limited liability companies (LLCs), family limited partnerships (FLPs), and a variety of trusts, are often used to bridge the gap between the negative positions and the +5 exempt assets (or TBE in limited circumstances, per above).
FLPs and LLCs will provide good asset protection against future lawsuits, allow for maintenance of control by the client, and can provide income and estate tax benefits in certain situations. Specifically, these tools will generally 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 also many types of trusts that provide significant protection for clients. These can range from life insurance trusts or charitable remainder trusts to grantor retained annuity trusts and more. Over the past 20 years, many states have passed statutes allowing domestic asset protection trusts (DAPTs) which can be an ideal trust protection tool for many physicians. Each trust type has its pros and cons, costs and benefits.
Obviously, for all these legal tools, asset protection benefits are reliant upon proper drafting of the documentation, proper maintenance, 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.
Utilize All Available Tools To Protect Your Assets
Asset protection planning, like any sophisticated multidisciplinary effort, is a matter of degree. Be sure to be guided by an advisor who utilizes all available tools to give you the highest levels of protection with reasonable costs.
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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.