Asset Protection for Physicians: Safeguarding Your Wealth

Asset protection isn’t just for the ultra-wealthy—it’s crucial for everyone, especially physicians who often face higher risks of lawsuits. This comprehensive guide will walk you through some of the easiest and most effective ways to implement asset protection today.

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The LLC (Limited Liability Company)

Inside Protection

An LLC can be an essential tool for asset protection, particularly for those with rental real estate or other business entities. When you buy rental real estate and it’s owned by an LLC, you separate that business from your personal assets. Let’s discuss how this inside protection works:

• Separating Business Assets from Personal Assets:
  • The primary goal is to ensure that if a tenant is injured on your property and decides to sue, only the assets within that LLC are at risk.
  • For instance, assume you own a rental property under an LLC. If a tenant sues you and wins, the only assets they can target are those within that LLC.
• Example: Rental Real Estate Owned by LLC:
  • If you own multiple rental properties, it’s wise to create separate LLCs for each to minimize risk. This way, if someone sues one property, only that specific asset is vulnerable.
  • Inside protection ensures that the liability is limited to the property within the LLC.

Outside Protection

Outside protection means your LLC is safeguarded from personal lawsuits. In simple terms, if you’re sued personally—perhaps due to a car accident—the assets in your LLC are protected.

• LLC Assets Safeguarded from Personal Lawsuits:
  • The worst that can happen is a “charging order,” where creditors can place a lien on distributions made by the LLC. However, many attorneys will tell you that a well-planned charging order is often useless.

State Rules

Different states have different rules regarding LLCs, making it critical to consult with an attorney.

• Single-Member LLC vs. Multi-Member LLC Protection:
  • Some states don’t offer much protection for single-member LLCs but do for multi-member LLCs. If your state requires multi-member LLCs for better protection, consider adding a trusted family member or business partner.

Treating LLC as a Business

It’s vital to treat your LLC like a business to avoid what is known as “piercing the corporate veil.” This can happen if you mix personal and business finances, making it easier for creditors to come after your personal assets.

• Maintaining Separate Accounts and Records:
  • Have separate checking and savings accounts for your LLC.
  • Use a dedicated credit card for business expenses like property maintenance.

Understand that if you don’t treat your LLC like a business, its protective benefits can be nullified.

Retirement Accounts and ERISA Protection

One of the simplest and most cost-effective forms of asset protection involves utilizing retirement accounts protected by ERISA (Employee Retirement Income Security Act).

401(k) and 403(b) Accounts

Retirement accounts like 401(k) and 403(b) plans offer robust federal asset protection under ERISA.

• Strong Federal Asset Protection:
  • These accounts are typically protected from creditors, making them a safe haven for your retirement savings.

IRAs and Roth IRAs

While IRAs and Roth IRAs offer protection, it varies by state.

• State-Level Protection, Varying Rules:
  • Some states protect both traditional IRAs and Roth IRAs, while others may only protect one or offer partial protection. For example, California protects IRAs but not Roth IRAs.

Tracking Rollovers

When rolling over funds from a 401(k) to an IRA, always segregate rollover assets from new contributions to maintain the protection.

• Segregating Rollover Assets from Contributions:
  • Don’t blend rollover assets with new contributions in the same account to maintain asset protection.
• Potential to Roll IRAs into 401(k) for Better Protection:
  • If you’re in a state with limited IRA protection, you can roll your IRA back into a 401(k) to maintain higher levels of asset protection.

Homestead Exemption

Your home’s value is often one of your largest assets, and protecting it is crucial. The homestead exemption can safeguard your home’s equity but varies greatly by state.

State-Specific Rules

Homestead exemptions protect a portion of your home value or equity and are specific to each state.

• Examples:
  • Pennsylvania: No homestead exemption.
  • Florida: Unlimited homestead exemption—you could literally have a $3 million home fully protected.
  • Massachusetts: Default exemption of $125,000, which can be increased to $500,000 by filling out a simple form.

Strategizing Primary Residence for Asset Protection

For those with significant assets, sometimes moving to a state with better homestead exemptions makes sense. Becoming a resident of a state like Florida can offer considerable tax and asset protection advantages.

Tenancy by the Entirety (TBE)

Tenancy by the Entirety is a form of ownership that offers asset protection for married couples but is only available in specific states.

Available in 18 States

This is a powerful tool if you reside in one of the states that offer it.

Requirements

There are some stringent requirements for Tenancy by the Entirety protection.

• Must Be with Spouse:
  • This option is only available for assets jointly owned with your spouse, not with other family members.
• Applicable to Investments and Property Titles:
  • You can use this to protect your investments and real estate properties in 18 states currently: AK, AR, DE, DC, FL, HI, MD, MA, MS, MO, NJ, OK, PA, RI, TN, VT, VA, and WY.
    • Side note: these 7 states allow it for real property, but not personal property (aka your home, but not your investment): IL, IN, KY, MI, NY, NC, and OR.

Alternative: Titling Assets in Lower-Risk Spouse’s Name

If Tenancy by the Entirety isn’t an option, consider titling assets in the name of the spouse with a lower risk of being sued.

• Example: Titling Assets Strategically:
  • For instance, if one spouse works in a high-risk profession like surgery and the other works in a lower-risk tech job, title more assets in the lower-risk spouse’s name.

Umbrella Insurance Policy

An umbrella insurance policy is a highly recommended tool for extra liability coverage over your home and auto insurance.

Additional Liability Coverage Over Home and Auto

This policy acts as an umbrella, providing extra layers of liability coverage.

Considerations

When purchasing an umbrella policy, consider your net worth and future needs.

• Coverage Amount Based on Net Worth:
  • Match your umbrella policy coverage to your net worth. For instance, if your net worth is $2 million, get a $2 million umbrella policy. Because these policies are relatively affordable, rounding up to the nearest million is often a good idea.
• Increasing Coverage Before Children Start Driving:
  • If you have children who are about to reach driving age, increase your coverage before they start driving. Many insurers will not allow you to increase the policy once your child is a licensed driver due to the increased liability risk.

Personal Liability Protection

Remember, umbrella policies provide personal liability protection, not professional liability. For physicians, this means coverage won’t extend to malpractice suits but will protect you in personal liability scenarios, like car accidents or injuries on your property.

Other Advanced Strategies

When basic protections aren’t enough, consider more advanced asset protection strategies.

Spousal Lifetime Access Trusts (SLATs)

SLATs allow one spouse to create a trust for the benefit of the other, providing asset protection and access to income from the trust.

Domestic Asset Protection Trusts (DAPTs)

DAPTs are established under the laws of certain states and offer strong protection against creditors.

Consulting Asset Protection Attorneys

For those with high net worths or unique circumstances, consulting an asset protection attorney can offer tailored strategies to safeguard your assets.

Proactive vs. Reactive Asset Protection

The key to effective asset protection is being proactive rather than reactive.

Importance of Being Proactive

It’s nearly impossible to protect assets after a lawsuit is imminent due to the typical four-year lookback period for asset transfers.

Typical 4-Year Lookback Period for Transfers

If you foresee potential liability, transferring assets during this period can be considered fraudulent, making them vulnerable to creditors. Being proactive and getting organized now ensures your assets are protected before any issues arise.

As a physician, your career and financial stability depend on intelligent asset protection. Implementing these strategies can provide peace of mind, knowing that your wealth is safeguarded against potential liabilities. By being proactive, you can protect your assets effectively and focus on what truly matters—your career and your loved ones.

 

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Disclosures