The Business Counsel Services Section of SettlePou is pleased to continue its three-part physicians’ series covering the following topics:
Attack on malpractice damage law caps (See SettlePou Newsletter Volume 4, Issue 3); (2) increasing the physician’s professional protection; and, (3) increasing the physician’s personal protection.
Part 2 – Increasing the Physician’s Professional Protection. The words “asset protection planning” has been thrown around so often that the actual meaning may have been diluted. This article is designed to detail the “What,” “Why,” “Who,” “When,” “How” and “Where” of asset protection plans. It will also provide information on exempt and non-exempt assets. Finally, it will detail the professional protections that can be provided to physicians.
What is asset protection planning? Proper asset protection planning is the orderly organization and structure of one’s assets and affairs (business and personal) in advance of potential liability, risk, judgment or other creditors’ claims to protect resources. Figuring out techniques that protect your assets is an extremely important and personal process.
Why would someone develop an asset protection plan? (1) To deter potential creditors from going after your assets; (2) to frustrate the collection process making it difficult or impossible for future creditors to grab hold of your assets or collect judgments against you; and (3) to form an estate plan (as will be detailed in the next article).
Who really needs asset protection planning? Most people think that asset protection plans are for extremely wealthy individuals. Asset protection plans are not just for the extremely wealthy individuals, but are for persons who have exposed assets and conduct activities that could create catastrophic liability. Based on judgment creditors’ rights, a person with more than $60,000 in net nonexempt assets should consider implementing an asset protection plan.
An example of a catastrophic event which could affect a physician is a malpractice claim in which a young professional is injured and can never work again. As explained in our last newsletter, the new Texas malpractice damage caps only non-economic damages, but economic damages are not capped. Such a catastrophic event would cause the economic damages to fall outside of the scope of the protection of the malpractice damage caps and most likely the physician’s insurance limits. This could leave the physician obligated to pay the remainder of a potentially large judgment.
When is it the proper time to begin asset protection planning? The best time to begin is now, but definitely before a claim is filed or made; otherwise, it may be considered a “fraudulent transfer.” A fraudulent transfer may occur when a person transfers property, in effect, to stop legitimate creditors from taking assets in order to satisfy a legitimate debt. Asset protection planning is not a means of defrauding creditors or even evading taxes. It’s a means to figure out and apply a series of lawful techniques that protect your assets from claims of future creditors.
How does one go about developing an asset protection plan? The physician should sit down with his or her professionals and conduct a risk assessment. This risk assessment will determine the likelihood and extent of the exposure, the activities that could create liability, the nature and extent of the physician’s assets (exempt vs. non-exempt assets), the family situation for future estate planning, and the personal wishes of that particular person. It is important when a physician is developing an asset protection plan to coordinate multiple professionals to ensure a solid plan. A good asset protection plan is like a custom-built chair. It has four solid legs and a sturdy back, but it still must be comfortable for you to sit in. At the end of the day, an asset protection plan must fit your needs. The professionals who should be a part of designing your plan are your CPA, financial planner, insurance agent and attorney. Each one of these individuals is a key ingredient in establishing your personal plan (or handcrafted chair).
Where do these assets go? The non-exempt assets can be properly moved and placed into structured trusts or other entities.
Protection of Assets – Exempt vs. Non-exempt
The first level of protection an asset receives is being deemed by the Government to be an exempt asset. There are five main categories of exempt assets: (1) homestead exemption; (2) personal property exemption; (3) annuities; (4) life insurance and (5) retirement benefits. Generally, anything that falls outside of these exempt asset categories is considered a non-exempt asset and is subject to the claims of creditors. The homestead exemption is considered judgment proof. But it is important to note that you can have only one home qualify for the homestead exemption.
For an individual there are certain levels of protection that can provide some type of asset protection. (1) The Government – The first level of protection comes from the Government. For physicians, the protection is Tort Reform. The malpractice caps limit non-economic damages and wrongful death. (2) General/ Professional Insurance – The next level of protection is to be properly insured. The problem with relying strictly on insurance is that it might not cover all possible risks; it might be insufficient; or your claim might be denied and/or the exclusions in the policy do not cover the activity.
(3) Corporate Structures – The third level of professional protection is corporate structures. Corporate structures allow you to move nonexempt assets into entities establishing certain levels of protections that an individual would not be able to receive. The main drawback is a potential loss of control after assets are moved. Depending on the need, the corporate structure could be a professional association, professional limited liability company or other types of affiliated entities.
Planning to protect one’s assets is important in light of the many risks in practicing medicine. Proper coordination, proactive planning and implementation can go a long way to achieve the desired results. In our next newsletter, we will present the final installment of our three-part series, Physician’s Personal Protection. This article will address the personal protection plans available to individuals. In addition, it will address estate planning aspects that can be incorporated into an asset protection plan.
By Michael S. Byrd and Bradford E. Adatto