Asset Protection for Physicians

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Asset protection refers to a set of legal techniques for protecting one’s assets against lawsuit and judgments.  Also, asset protection planning is an integral part of any good estate and business plan.  This type of planning focuses on structuring asset ownership to make it more difficult, if not impossible, for potential creditors to reach the assets of the physician-debtor.  The focus of all asset protection planning for physicians is to remove the physician from legal ownership of his assets, while retaining the physician’s control over and beneficial enjoyment of the assets.  Depending on the assets owned by the physician, the aggressiveness of a plaintiff and certain other factors, different structures will be used to protect a physician’s assets.  Asset protection for physicians is of tremendous importance because they are seen as deep-pocketed targets.

There are numerous asset protection alternatives to physicians, including maximizing contributions to IRAs and qualified retirement plans; using various forms of trusts (including domestic asset protection trust, irrevocable life insurance trust, and qualified personal residence trust); retitling property ownership in certain ways (i.e., joint ownership and ownership by entities) to the conversion of assets into forms that are exempt from seizure by creditors; utilizing limited liability companies to protect real estate and other investments; and using life insurance in certain instances. Such strategies and techniques can legally, ethically and effectively shield a physician’s assets from any lawsuit and any creditor. Whatever a physician’s goals, there are several asset protection strategies that can be undertaken and asset protection devices employed to ensure that his property is protected, including:

The most common technique employed by physicians to protect assets involves the purchase of malpractice insurance, but it doesn’t end there. Malpractice insurance is the starting point but not the ending point for a solid asset protection plan. Thus, while malpractice insurance is recommended, many law suits are for far more than the insurance will cover. Therefore, it is important to carry plenty of malpractice coverage, in addition to other asset protection strategies.

The legal details of retirement plans and IRAs can be very complicated.  But a simple point to keep in mind is this: maximizing contributions to retirement accounts is a very basic (and very effective) tax and asset protection strategy. Funding your retirement accounts to their maximum level is a powerful combination of creditor protection and tax deferral. Your retirement accounts come with creditor protection built in. Also, assets in IRA’s and certain qualified employee benefit plans under the federal ERISA law (Employee Retirement Income Security Act of 1974), such as 401(k) plans are awarded special protection from creditors. Many plans (including 401(k)(s) are also protected in bankruptcy because they are not considered part of the bankruptcy estate.  But, the Bankruptcy Abuse and Protection Act of 2005 limits IRA exemption in bankruptcy to only $1,000,000.

Not all trusts provide asset protection, but some do. For example, Irrevocable Life Insurance Trust (ILIT) can be a great estate planning tool and can also provide significant asset protection.  If the ILIT is formed properly, creditors of both the person (i.e., the physician) who set up the ILIT and the beneficiary should have no rights in either the cash value or the death benefits of the insurance policy.

In addition, life insurance owned by an irrevocable life insurance trust is not a part of the insured-physician’s estate for federal tax purpose, nor for Ohio estate tax purposes. Proper planning of an irrevocable insurance trust provides that the trust be established prior to the acquisition of the insurance policy. The trust then purchases the insurance policy and the granter/insured-physician, therefore, never has any incidents of ownership whatsoever in the policy. Having the trust own the policy prevents the IRS from considering the death benefits as part of the physician’s estate upon his death, and avoid its inclusion in calculating the physician’s estate.

Another common use for an irrevocable trust is to provide asset protection for the physician and the physician’s family by placing assets into an irrevocable trust.  The physician gives up complete control over, and access to, the trust assets and, therefore, the trust assets cannot be reached by a creditor of the physician.  However, the physician’s family can be the beneficiaries of the irrevocable trust, thereby still providing the family with financial support, but outside of the reach of creditors.

There are many different structures used in asset protection, but there is no one single magic bullet structure. Basically, we work to get the assets out of a client’s name, but there is a right way and wrong way to do that.  Many people simply transfer assets to their kids names, but that approach very rarely works because it is an easy type of transfer to set aside.  There are certain types of structures you can put money in, retain control over those assets, access them freely, and suffer no tax consequences, while also making it very difficult and expensive for some creditors to reach them.

Protecting rental or investment real estate, or a side-business of the physician, is usually accomplished through the use of a limited liability company or limited partnership. Assets owned by a physician through an LLC or a limited partnership are not deemed owned by the physician because these legal entities have their own separate legal existence. If the physician transfers the ownership of his building into an LLC, the physician will no longer be treated as the owner of the building. He will be treated as the owner of a membership interest in the LLC.  This means that a plaintiff suing the physician will no longer be able to reach the building directly, he would have to purse the physician’s interest in the LLC.  This is because there are provisions in the laws such that when you, as an LLC member are sued, assets inside of the LLC can be protected from being taken away from you.  Because the assets are owned in these legal structures, the courts treat them differently than if individually owned.

Requiring a creditor-plaintiff to pursue an ownership interest in an LLC or in a limited partnership is a lot more advantageous for the doctor because interest in LLCs and limited partnerships are not subject to attachment by a plaintiff.  This is known as the “charging order” protection. In Ohio when property is transferred into an LLC, it is immediately protected from creditors pursuant to Ohio’s charging order protection.  The charging order protection limits a plaintiff’s remedy to a lien against the distributions from the legal entity, without conferring on the plaintiff any voting or management rights.  Because the doctor will remain in control of the entity and can defer distributions, the plaintiff will have no way of  enforcing the judgment against the doctor’s LLC or limited partnership interests or the assets owned by these entities.  In short, that means that a creditor is only entitled to distributions made from the LLC to the owner.  If the LLC does not make distributions, the creditor is entitled to nothing.  The creditor has no claim on the ownership interest itself and cannot force a sale. Clearly, as a practical matter, LLCs and limited partnerships create a formidable obstacle to creditors collection efforts. 

Liquid assets may be protected through many techniques which include, limited liability companies,  limited partnerships and irrevocable trusts.