Practicing medicine is a highly litigious profession. In fact, a study published by the New England Journal of Medicine found that a staggering 99% of physicians in high-risk specialties will be sued by the age of 65. Take the example of a surgeon who was in a rush to pick up his daughter from school and accidentally struck a nurse in the hospital parking lot. He got out of his car to make sure she was all right, and aside from a few minor scrapes on her leg she assured him she was fine. He walked her to her car, and even called the next day to make sure she was okay. Two weeks later, he received notice of a civil lawsuit that would eventually erode his family’s multimillion-dollar nest egg.
Carefully constructed asset protection strategies that are fully implemented before any hint of trouble are more likely to be effective in warding off potential lawsuits or reducing the settlement amount. Having your end goal in mind is extremely helpful when developing a solid plan of protection. The first step is to asses where you’re at today from a risk standpoint and how that falls short from your preferred state of protection. Fortunately, you can defend many of your assets from potential lawsuits by following a risk management model that will systematically title your property in an advantageous way.
Asset protection plays a critical role in many different aspects of your financial plan. If you’re starting a practice, you’ll need to recognize the implications your business plan will have on your estate. Or if you’re developing an estate plan, you need to assess what ramifications those strategies will have on your practice. Ideally, these methods will also be set up in a way that reduces your tax obligations and allows your heirs to avoid the process of probate.
A carefully drafted risk management plan that exempts your assets and business from liability claims will make you a less viable target for a lawsuit. However, assets that are legally exempt from creditors can vary widely from state-to-state on a case-by-case basis. Because every state has different laws to consider, it’s recommended that you partner with an attorney who is familiar with your state’s asset protection laws and case history.
Timing is everything when it comes to risk management. Asset protection strategies are only truly effective if done proactively. A reactive approach to risk management likely won’t be able to keep your assets safe. Asset protection is about preventing wealth erosion – it’s not about trying to defraud or evade taxes.
When purchasing a home, it’s important to title it so that you won’t be vulnerable to unmerited lawsuits while still allowing you to deduct the interest on your mortgage. While some lenders will require you to hold the title in your personal name, some states do not. Certain states offer asset protection for houses held in joint tenancy with a spouse. However, this strategy only works if your spouse is not party to the lawsuit. In other states, owning your home as tenants by the entirety may be more beneficial than joint tenancy. Transferring the title to your spouse, a trust owned/settled by your spouse or an LLC owned by your spouse’s trust may offer superior protection in some circumstances.
When purchasing the facility where you want your medical practice to be located, many of these same issues apply. You have to decide whether you want to put that property in your name, or in the form of an LLC that you co-own with your spouse. If you have a partner, there should probably be a buy-sell agreement in place that stipulates what would happen to the practice and its real estate in the event of a death or disability.
For planning purposes, you’ll want to look at your complete list of assets and classify them as:
- Practice-operating assets
- Practice-capital assets
- Individual investments
- Personal assets
Once your assets are classified, the next step is to build legal walls between your investment and personal assets so that they’re not on the table in the event of a liability. Incorporating your practice normally protects your personal assets from non-malpractice claims against the practice. By doing this, only a portion of your assets would be vulnerable if the liability is limited to wherever the incident occurred.
Oversight is Critical
When implementing an asset protection plan, the involvement of several different professionals from a variety of different disciplines is required. The services of an attorney, accountant, insurance agent and mortgage professional may all be necessary at some point, and coordinating their efforts is not always an easy task. It’s critical to work with professionals that have a fiduciary responsibility and are personally familiar with your values and objectives.
Asset protection is an area of wealth management that affluent physicians can’t afford to ignore. A risk exposure analysis will allow you to determine which personal and practice assets could be vulnerable and implement proactive strategies to protect them.
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