Shielding Your Wealth From Potential Liability

Many aesthetic physicians are right to be concerned about potential liability. Life and work as a physician, practice owner, and parent bring with it many types of liability risks, including malpractice, employee claims, HIPAA violations, contract disputes, slip-and-falls, and car accidents. To shield wealth from these potential claims, aesthetic physicians have the option to implement asset protection planning.

A Sliding Scale

As an initial step, an asset protection professional will approach 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, asset protection specialists will try to structure assets so they have the best protection that is reasonably possible under the circumstances, which can include how much the client wants to spend, the value of the asset, and the client’s marital status, state of residence, and interest in estate planning. Each asset protection tool has certain efficacy and costs/benefits.

The most common misconception that physicians have regarding asset protection is thinking that an asset is either “protected” or “not protected.” In reality, each asset is shielded from liability to a certain degree. For the past 20 years, I have used an asset protection sliding scale ranging from –5 (totally vulnerable) to +5 (highest level of protection). The goal of asset protect planning is not to move all assets to a +5 position—this is simply not possible, even in the states with the most protective laws. On the other hand, too many physicians have too many of their assets in negative positions with little or no shield. At a minimum, nearly all physicians would benefit from moving the bulk of their personal and practice assets to positive positions.

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. You can own the exempt asset outright in your name, have access to any values and still have it 100% protected from a 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.

Joint Ownership Forms

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. 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) and a variety of trusts, are often used to bridge the gap between the negative positions and the +5 exempt assets (or TBE sometimes).

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, which typically allow a physician to create enough of a hurdle against creditors to negotiate favorable settlements. We often call LLCs the building blocks of basic asset protection.

There are also many types of trusts that provide significant protection for clients, 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 physicians. Each trust type has its pros and cons, costs and benefits.

Asset protection benefits are reliant upon proper drafting of the documentation with respect for formalities, appropriate maintenance, and suitable ownership arrangements. If all these are in place, the physician can enjoy solid asset protection for a relatively low cost.

Assure Protection

Asset protection planning, like any sophisticated multidisciplinary effort, is one with relative pros and cons for each tactic or strategy. Be sure to consult with 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. Information obtained from third party sources are believed to be reliable but not guaranteed. OJM makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. 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.