Business Counsel Services

Asset Protection Planning

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.

Professional Protection

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

Business Counsel Services

Just when you thought it was safe again… A National and State Review on Holes in Malpractice Damage Caps

SettlePou is pleased to announce a three part series from the Business Counsel Service Section for physicians, discussing the following: (1) the attack on malpractice damage caps; (2) increasing the physician’s professional protection; and (3) increasing the physician’s personal protection.

Part One

As children growing up in the 70’s, nothing scared us more than being attacked by a great white shark when jumping into the deep end of the pool (“Cue-Jaws Soundtrack”). But just when you thought it was safe again, Jaws 2 came out, terrifying us all over again.

Just as Jaws scared us out of the pool, many lawsuits have scared medical practices into limiting the types of procedures performed or out-right retiring. In 2004 Texas legislation, as in many other states, introduced a medical malpractice cap as a means of protecting physicians. For example, in Texas a patient can only recover $250,000 for noneconomic losses and $500,000 for wrongful death. However, just when physicians thought it was safe again, physicians are encountering new lines of attack. The two most prominent attacks, which will be discussed in this article from both a national and state perspective, are: (1) using of consumer protection laws against physicians, and (2) establishing high economic damages in a malpractice case, which many times are uncapped.

Consumer Protection Laws

Consumer Protection laws are designed to protect the state’s citizens from unfair and deceptive bargaining power against larger, more capitalized entities. Because the legislature cannot specifically address each area where a consumer might encounter an unfair business practice, the state statutes giving rise to consumer protection claims are often broad. Courts then have the final say on to whom the statute applies, or in other words, how consumers will be limited in pursuing damages under consumer protection statutes.

Developments Across the Nation.

To combat the medical malpractice caps, plaintiffs look for other avenues to pursue their claims. Essentially, in many states, plaintiffs are now either tacking on consumer claims against physicians to get around the medical malpractice limitations, or they are abandoning their physician negligence claims altogether and seeking only the consumer protection claim. The critical issue for courts, so far, has been how carefully the legislature drafted the statute when limiting liability. For instance, Pennsylvania decided that consumer protection statute did not apply at all to physicians supplying medical services, but only to business enterprises engaged in trade or commerce. However, this is an exception as most states allow consumer protections claims against physicians in a limited capacity.

The other extreme is when the legislature drafts a statute broadly enough to allow for consumer protection claims for a physician’s negligence. Thus, even though the state has medical malpractice limitations for recovery resulting from a physician’s negligence, it allows patients to circumvent the limitations by bringing consumer protection claims to recover for their injuries. The plaintiff will point to written representations, advertisements, or other oral representations made by or on behalf of the physician as lulling the patient into a false sense of security. If this activity rises to the level of a deceptive or unfair trade practice, it could subject the physician to hefty damages for something that essentially arose out of a negligent rendering of medical services. In Kansas, for example, the Supreme Court decided that the language of the statute was broad enough to allow consumer protection claims to be brought against physicians who provide medical treatment or services.

Most states strike a balance between these two extremes and allow claims against physicians under a consumer protection statute only in limited circumstances. Generally, consumer protection claims can be brought against a physician when the nature of the claim arises out of the “entrepreneurial, commercial, or business aspect of a physician’s practice”. A patient cannot simply recast a negligence claim as a consumer protection claim to avoid malpractice limitations. Colorado requires a certificate for review for all cases brought against physicians, so if a consumer protection claim sounds in negligence as well, the plaintiff must provide expert testimony to support its claim. The need for medical expert testimony often suggests a negligence claim rather than a consumer protection claim. Similarly, with regard to federal claims brought under the Federal Trade Commission Act (“FTCA”),
federal courts have also required the claim to arise out of the commercial or business aspects of a physician’s practice.

The Texas Approach. Texas has addressed the issue several times and has been very reluctant to allow claims against physicians under the consumer protection statute. Even when a dentist represented that he could do a bone graft “with no problems,” said a skin graft would work as well as a bone graft, and made statements about a patient’s prognosis, the Supreme Court said the dentist’s statements had to do with the medical standard of care sounding in negligence and not deceptive or unfair trade practices. The plaintiff’s claims was dismissed for failure to submit an expert report. Ultimately, the court looks to the underlying nature of the claim to determine whether it involves a breach of the accepted standard of medical care rather than a claim for deceptive trade practices. In another case, even when the physician expressly warranted to a patient that she would not be sedated and he thereafter sedated her, the Supreme Court said the representations all have to do with whether the administration of a general anesthetic under all the circumstances met the standard of care for anesthesiologists.” Therefore, the Texas approach only allows a claim to be brought under the Deceptive Trade Practices Act if it does not have to do with the standard of medical care.

A Cap is not a “CAP” when it’s Economic.

Tort reform measures place some limitations on physician liability, and, in many states including Texas, have helped significantly reduce frivolous lawsuits and reduce insurance premiums (at least for some specialties). However, tort reform does not eliminate the risk for a substantial judgment against a physician.

In explaining tort reform, the damages caps typically put in place cover non-economic damages. Non-economic damages include things that do not involve a cash loss, with no precise value, such as pain and suffering, emotional distress and loss of consortium or companionship. In Texas, patients are limited to recovering $250,000 for noneconomic damages. California and Montana also cap non-economic damages.

Few have a counterpart limitation, however, on economic damages. Economic damages encompass actual pecuniary losses, such as health care expenses, loss of wages, medical bills, and damage to property. As a result, there can be significant exposure for a physician where a catastrophic injury occurs to a patient, particularly to a well educated patient who can establish significant lost wages damages.

While many physicians believe that tort reform eliminates their exposure for malpractice claims, the reality is that tort reform helps but cannot be relied upon as the sole protection from a massive malpractice judgment. It remains important for physicians to review their professional and personal structures as a means to taking needed steps for protection.

By Michael S. Byrd and Bradford E. Adatto