Yahnian Law Corporation

Asset Protection for the Successful Doctor

Competence and confidence are the marks of a good doctor. Yet, once in a while, we are all prone to poor judgment, inattention to detail, slip ups. What happens then? Specifically, what happens to the doctor and his or her practice from a financial standpoint?

Assuming that insurance will not cover the claim, what happens to the medical practice, the house, the rental real estate, the brokerage accounts, the car and the kids?

Asset protection planning is an integral part of any good estate and business plan. This type of planning focuses on structuring the asset ownership to make it more difficult, if not impossible, for potential creditors to reach the assets of the doctor-debtor. The difficult part is not to simply shield the assets ? that is easy. The difficulty is in accomplishing that both legally and ethically.

Overview of Asset Protection

No single asset protection strategy fits all, and for every individually seeking asset protection a custom-tailored plan should be designed. But first, the following four questions should be addressed: (1) who is the likely debtor?; (2) what is the nature of the claim?; (3) who is the likely creditor?; and (4) what are the assets to be protected?

All of these questions will weigh on what type of planning can be implemented, and whether any planning can be done in the first place. For example, every state has passed laws to bar the so-called 'fraudulent transfers.' These laws prevent debtors from making any transfers of assets that would defraud a creditor. However, these laws do not make planning impossible, merely difficult. As a general rule, if one waits until a judgment has been entered or a lien has been recorded, it may be too late to do anything. But if action is taken ahead of time, the fraudulent transfer laws will not implicate the planning process. That is why in asset protection planning it is extremely important to plan ahead of time.

Protecting Specific Assets

Of the four questions listed above, the nature of the assets to be protected will drive the asset protection planning. For example, a qualified retirement plan, such as a profit-sharing plan, enjoys a great deal of asset protection under federal law. Only the federal government can reach the assets of a qualified plan. The same is not true for nonqualified plans, such as IRAs. The nonqualified plans enjoy no protection under federal law, although some states provide limited protection to these types of plans. Consequently, as part of the planning the doctor may want to consider converting his or her IRA into a qualified plan.

Protecting rental or investment real estate, or a side-business of the doctor, is usually accomplished through the use of a limited partnership or a limited liability company. The same limited partnership or LLC that is so commonly used for estate planning (they are usually referred to as family limited partnerships) has great asset protection benefits.

For example, assume the tenant of an apartment building owned by a doctor slips, falls and sues. If the doctor owns the building directly, then the tenant will be able to enforce the judgment against any of the doctor?s assets. However, if the building is owned by a doctor through a limited partnership or an LLC, the tenant-creditor will be able to satisfy the judgment only against the apartment building and will not be able to proceed against other assets of the doctor. The limited partnership or the LLC will also protect the assets within the entity from the lawsuits directed against the doctor personally. Thus, for example, if the doctor is sued by a patient and his apartment building is owned through an LLC, the patient-creditor will not be able to simply get the apartment building, the LLC will shield that asset.

While an LLC may protect rental or investment real estate, it is a weak tool for protecting personal residences. There is generally no ?business purpose? for placing a personal residence in an LLC (or any other entity) and the creditor may be able to reach the doctor?s house. For personal residences, a common estate planning tool known as a ?residence trust? may be the best protection.

Protecting cash and securities is usually the hardest. It is also of the utmost importance, because cash and securities will be the first asset a creditor will pursue. For these types of assets a foreign trust is often utilized. While the term ?foreign trust? scares some people, it is really little different from a standard estate planning trust. The only difference is that the trust is administered under the laws of a foreign country. The assets of the trust (cash and securities) can remain in the United States.

Other Strategies

There are many other asset protection strategies currently utilized by practitioners. For example, married couples should be aware that in community property states such as California, all of the community property is liable for the debts of either spouse. This means that a lawsuit against either spouse will reach all of the couple?s assets. With proper planning this can be avoided.

In non-community property states like New York or Florida, a creditor of one spouse can only reach the assets of that spouse. Let us assume that one spouse is a plastic surgeon, and the other one grows orchids. Obviously, the surgeon is exposed to a lot more risk. This means that some form of reallocation of assets between the two spouses should be considered, where some of the assets are moved from the surgeon to the other spouse.

Conclusion

Accumulation of wealth is only one side of the coin. Preservation is equally important. That is why effective but ethical asset protection planning should be an integral component of any estate plan.