As a physician, your assets are hard-earned, and it’s essential to protect them from potential legal threats such as a malpractice claim. This guide aims to provide you with valuable insights and practical strategies for effective asset protection.
What are personal assets?
Personal assets are property or possessions that an individual owns and that have value, such as:
Cash and investments
This includes money in bank accounts, brokerage accounts, stocks, bonds, mutual funds, and other investment products.
This includes any property that an individual owns, such as a home, rental property, or vacant land.
This includes physical possessions such as a car, furniture, artwork, and jewelry.
Business ownership interests
Any medical professional such as physicians or dentists, may choose to own a business, such as a medical practice or clinic, either individually or in partnership with other physicians.
Owning a business can provide opportunities for increased income and professional autonomy, but it also exposes you to potential liabilities, which makes asset protection a critical consideration.
This includes 401(k)s, IRAs, and other retirement investment accounts.
This includes life insurance policies, disability insurance policies, and long-term care insurance policies, umbrella policies or any other individual insurance coverage from all insurance providers.
This includes copyrights, trademarks, and patents that an individual owns.
What are asset protection strategies?
- Setting up a limited liability company (LLC): An LLC is a business structure that provides personal liability protection to its owners. By setting up this asset protection vehicle, a physician can protect their personal assets from legal liabilities and creditors that may arise in connection with their professional activities.
- Creating a trust: Creating an irrevocable trust with the guidance of an estate planning and asset protection attorney can be an effective strategy to protect your assets. An irrevocable trust is a legal arrangement in which you transfer ownership of your assets to a trustee, providing a layer of protection from potential legal claims while allowing you to maintain control and use of your assets within certain parameters.
- Purchasing insurance: Purchasing insurance is a common and effective asset protection strategy that can help mitigate financial risks, estate tax and provide a layer of protection in case of unexpected events or liability claims. Insurance policies such as professional liability insurance, general liability insurance, and umbrella policies can provide coverage for legal expenses, damages, and settlements, minimizing the financial impact on your personal assets.
12 Options for asset protection planning
1. Malpractice Insurance for Doctors
Malpractice insurance, also known as professional liability insurance, is a type of insurance that covers physicians and other healthcare professionals for claims related to professional negligence. It is designed to protect a healthcare professional’s assets in the event that they are sued for medical malpractice.
Pros of malpractice insurance for asset protection:
- Provides financial protection: Malpractice insurance can help protect a physician’s assets in the event of a medical malpractice lawsuit, which can be financially devastating.
- Can help with legal defense costs: Malpractice insurance typically covers the cost of legal defense in the event of a lawsuit, which can be a significant burden for a physician.
Cons of malpractice insurance for asset protection:
- May not cover all types of claims: While malpractice insurance can protect against claims related to professional negligence, it may not cover other types of claims, such as criminal charges or fraud.
- Can be expensive: Malpractice insurance can be costly, especially for high-risk specialties.
- Another con of malpractice insurance is that policy limits may not be sufficient to cover the full extent of damages or legal expenses in case of a claim. In some cases, malpractice claims can result in judgments or settlements that exceed the policy limits, leaving the physician responsible for paying the difference out of pocket. It’s essential to carefully review and understand the policy limits and consider purchasing additional coverage or other asset protection strategies to mitigate this risk.
2. Umbrella insurance policy
An umbrella insurance policy is a type of insurance that provides additional liability coverage above and beyond other insurance policies, such as a homeowner’s insurance policy or a car insurance policy. Umbrella insurance can be a useful tool for asset protection, as it can provide an extra layer of protection in the event of a lawsuit or other legal liability.
Pros of umbrella insurance for asset protection:
- Provides additional liability coverage: Umbrella insurance can provide an extra layer of protection for a physician’s assets in the event of a lawsuit or other legal liability.
- Covers a wide range of risks: Umbrella insurance can cover a wide range of risks, including personal injury, property damage, and defamation.Cons of umbrella insurance for asset protection:
- May not cover all types of claims: While umbrella insurance can provide additional liability coverage, it may not cover all types of claims. It is important to carefully review the terms of the policy to understand what is covered.
- Can be expensive: Umbrella insurance can be costly, especially for high-risk individuals or those with a lot of assets to protect.
Umbrella insurance policies are offered by many insurance companies, including major providers such as Allstate, Geico, State Farm, and Nationwide. It’s important to compare the coverage, terms, and premiums offered by different insurers to find the best fit for your asset protection needs.
3. Prenuptial agreements
A prenuptial agreement, also known as a premarital agreement or a prenup, is a legally binding contract that is entered into by a couple before they get married. Prenuptial agreements can be used to define the financial rights and responsibilities of each spouse in the event of divorce or death.
In the case of physicians, a prenuptial agreement can be a useful tool for asset protection, as it can help to clearly define the ownership of each spouse’s assets and protect those assets in the event of a divorce.
4. Tenants by the Entirety
Tenants by the Entirety can be a useful asset protection strategy for physician couples since it provides protection for jointly-owned assets, such as a home or investment property, from individual legal claims or debts incurred by one spouse.
However, it’s important to note that this protection may not extend to business assets or individual accounts, and the rules for Tenants by the Entirety can vary by state.
5. Domestic Asset Protection Trusts
Domestic asset protection trusts (DAPTs) can be an effective asset protection strategy for physicians since they provide a legal means to transfer ownership of assets to a trust while retaining some control and access to the assets, while also shielding them from potential legal claims.
However, DAPTs are not available in all states, and there are strict legal requirements and potential risks to consider before establishing one with an experienced law firm.
6. Offshore trusts
Offshore asset protection trusts can provide additional asset protection benefits for physicians by placing assets outside the jurisdiction of U.S. courts, but they also come with additional complexity, legal requirements, and potential tax implications.
Distribution rules and restrictions for offshore trusts can vary widely, and it’s important to consult with a knowledgeable attorney and financial advisor before considering this strategy.
7. LLCs, Corporations, and Family limited partnerships
LLCs, corporations, and family limited partnerships can be useful asset protection tools for physicians since they provide a legal structure for owning and operating a business, which can limit personal liability for business debts or legal claims.
Some states, such as Wyoming, Nevada and Delaware, offer favorable state laws for forming and maintaining these entities, which may offer additional protection benefits. It’s important to understand the rules and requirements for forming and operating these entities in the chosen state and seek professional advice on the most effective structure for your situation.
8. Protecting real estate such as rental properties and more
There are several strategies that individuals can use to protect real estate assets, such as rental properties, from creditors and legal liabilities. Some options include:
- Setting up a limited liability company (LLC): By setting up an LLC to own the rental property, the individual can protect their personal assets from legal liabilities and creditors that may arise in connection with the rental property.
- Creating a trust: A trust can be used to hold and manage real estate assets, such as rental properties. By creating a trust, the individual can protect their assets from creditors and legal liabilities.
- Purchasing insurance: Insurance can provide protection for real estate assets in the event of a lawsuit or other legal liability. Types of insurance that may be relevant for real estate assets include homeowner’s insurance, landlord’s insurance, and umbrella insurance.
9. Retirement accounts
Retirement accounts, such as 401(k) plans, traditional individual retirement accounts (IRAs), and Roth IRAs, can be used as a tool for asset protection. These accounts are designed to help individuals save for retirement, but they also offer some protection from creditors and legal liabilities.
10. Equity stripping
Equity stripping is a technique that is used to reduce the value of assets in order to protect them from creditors. There are several ways to strip equity from assets, such as transferring ownership of the assets to a limited liability company (LLC) or creating a family limited partnership (FLP).
Pros of equity stripping for asset protection:
- Reduces the value of assets: By transferring ownership of assets to an LLC or FLP, the individual can reduce the value of the assets and make them less appealing to creditors.
- Provides liability protection: LLCs and FLPs provide liability protection for their owners, which can help to protect their personal assets from legal liabilities and creditors.
Cons of equity stripping for asset protection:
- May be challenged in court: Equity stripping techniques may be challenged in court if they are deemed to be fraudulent or if they were created with the intention of defrauding creditors.
- May be costly to set up and maintain: Setting up and maintaining an LLC or FLP can be expensive, as they require the services of a lawyer and may have ongoing legal and administrative costs.
It is important for individuals to carefully consider the pros and cons of equity stripping as it relates to asset protection and to seek the advice of a qualified attorney before implementing any asset protection strategies.
An annuity is a financial product that provides a stream of payments to an individual in exchange for a lump sum payment or a series of payments. Annuities can be used as a tool for asset protection, as the assets used to purchase the annuity are generally protected from creditors.
12. Whole life insurance
Whole life insurance is a type of permanent life insurance that provides coverage for the policyholder’s entire life. Whole life insurance policies also have a savings component, called the cash value, which accumulates over time and can be used by the policyholder for various purposes, including asset protection.