"What's up Doc?" What are some of the common planning mistakes many physicians make? Here' Bugs' dozen top votes:
o "I won't get sued for more than the limits on my malpractice policy." Wishful thinking, but it won't keep Lord Voldemort, Esq. at bay. Not only was there never merit to this, there are cases on point confirming that Plaintiff's recoveries are not limited by your coverage.
o"I put all my assets in my spouse's name, I'm safe." Good plan but you missed the Sesame Street episode on the letter "D"! Divorce.
o "I'm not worried about malpractice." Yeah, but that's not the only risk. ◙ If your son has a beer bash while you're away that gets out of control how much might the suits cost? ◙ A physician that knew best was on vacation with his wife. She imbibed a bit too much when out with her friends and drove over a line of children waiting for a school bus. At least it solved their estate tax problem! ◙ The median family net worth is about $60,000. $2.5 million puts in you in the wealthiest 1%. When Willie Sutton, the famous bank robber, was asked why he robs banks he retorted "Because that's where the money is at." Your wealth alone may be a magnet for claims. It's not only about malpractice Doc.
o "I need to have an offshore asset protection trust." Great plan if it's right for you:
◙ $5-10 million investment assets really offshore. ◙ It should only be used for a portion of your assets (a nest egg). ◙ $25,000 - $50,000 in costs. ◙ Should only be done if all other techniques appropriate to your situation have already been implemented. ◙ Lots of snake oil salesman pushing FAPTs (the same guys who sell living trusts to avoid the evils of probate). ◙ Try it on the cheap and you could be getting free government room and board until you repatriate the assets you transferred. ◙ "You can paint it any color, so long as it's black."Asset protection isn't like Model-T's, you need more options than black or just a FAPT.
o "I paid an attorney to protect my assets; I don't need to do anything else". You're still looking for the magic bullet - they don't exist, not even at Hogwarts. ◙ Any technique that might help you requires your continued effort and involvement. ◙ If your accountant isn't involved it won't work. Every trust and entity requires a tax filing. Every trust and entity must have proper recordkeeping to be respected. That means more cost, time and complexity. ◙ Your insurance consultants must be involved. Life insurance is a powerful asset protection tool. Property and casualty insurance are important too. Assuring that each asset and business is properly insured (and that the insurance reflects the proper trust, LLC, PC and other entity that owns the assets) is a critical first line of defense to all sorts of claims. You cannot plan without your insurance advisers involved. ◙ Follow through is important. If you set up a trust and don't transfer assets to it, it's useless.
o "Investment planning - I can do better than those fee only folks." The stats say you're way wrong. But a good wealth manager is an integral part of your asset protection team, not just an ETF picker. Which entities should own which assets and how can overall family asset allocation goals be achieved. Another spin. How much did you loose in the 2000 or 2009 meltdowns? Investment risk is as real as malpractice risk. ◙ Bottom line - you need a team of advisers and your plan must be coordinated and monitored at least annually.
o "I don't have enough assets to worry about planning." Yes, you do: ◙ Planning, to be successful, has to be implemented well in advance of any claim. The time to start planning is yesterday. If you wait until you have "enough" assets (when is that?) it's too late. ◙ You don't have to spend $50,000 for an asset protection plan. The plan should be tailored to your specific circumstances. If your asset base is limited, you shouldn't ignore planning, you should engage in planning appropriate for your circumstances. ◙ It's not only about your assets. If your parents (or another benefactor) intend to leave you assets, you should plan for those assets too (an inheritor's trust).
o "It's too expensive to do." The costs, relative to your malpractice premiums are probably modest. ◙ You can and should undertake planning in distinct phases or steps. Not only does that make it more cost effective, but it makes it simpler to understand and implement. ◙ Addressing planning in phases will improve your chances of success. Doing the kitchen sink might be too costly. Take steps along the path cannot be.
o "Asset protection is about protecting my home and investments, it doesn't have anything to do with my practice?" Well, Muggle, you seem to be missing things that are clear as day to a wizard. The safer you run your practice, the less your asset protection plan will have to be tested! If you have a professional corporation for your practice, be certain it adheres to all corporate formalities. Examples: Adequate capitalization (watch accounts receivable factoring and other techniques if applied in excess), annual meetings, signed minutes, signed and implemented shareholders' agreement (an agreement with provisions that are ignored demonstrates a lack of adherence to corporate formality), signing documents properly (in the name of the entity by an authorized officer), and so forth. Remember, the proper use of a professional entity will help insulate you from claims against other physician shareholders or members.
o "I want the Whipple Procedure of asset protection planning!" Medicine and law are practiced quite differently. Docs like giving procedures and equipment special names. In estate and asset protection planning cutesy names usually mean a marketing gimmick, not a good planning tool or the sign of a renowned practitioner. It's just different. Even Elvis says you're barking up the wrong tree! If a planning technique has a fancy name, and especially if it has a trademarked name, don't do it without clearing it with a reputable team of practitioners. Example: When establishing a charitable remainder trust (CRT) many advisers recommend a "wealth replacement trust". It's really just an insurance trust with a fancy name. While it's a great technique in the right circumstances it's not appropriate for everyone, and the fancy name should make you suspicious. Hire competent professionals in each appropriate specialty. Hire a good CPA, attorney, insurance consultant, and financial planner, that understand and work with asset protection planning, not someone who specializes in planning for physicians. You want skilled practitioners, not a person skilled in marketing to physicians.
o "A FLP will protect my assets." You need to understand some core concepts. "Inside liability" is the liability associated with a particular asset. Example: You own a rental property. If a tenant sues, that is inside liability associated with the investment. You could have the rental property owned by a family limited partnership ("FLP") limited liability company ("LLC") to prevent "inside" liability from reaching your other assets, such as your home. "Outside Liability" is liability created by an asset or activity other than the asset/activity in question, and from which you need to protect that asset. Example: You want to protect your rental property from malpractice risk. If your rental property is owned by an LLC a malpractice claimant that obtains a judgment should only be able to obtain an interest as an assignee of your membership interest. Reality: A one member LLC may not afford this protection. Better Plan: Fractionalize ownership of the LLC so you own less than 50%.
o "I need sophisticated planning." Maybe, but your Defence Against the Dark Arts starts with the basics. They are cheaper, simpler and can be quite effective. ◙ Non-deductible IRA. The financial media tells you not to invest in a non-deductible IRA. They're wrong. It's a great asset protection tool. Contribute $5,000 ($6,000 if over 50) as soon as possible after January 1 each year. It's an independent pot that is protected up to $1 million under the bankruptcy act. It has no costs, no legal fees and no complexity. The more separate protected pots, the more difficult to attack your assets. Further, an IRA has an ideal non asset protection motive, you're saving for retirement. ◙ Pre-fund retirement assets. If you have a pension plan fund it as soon as possible each year. ◙ Consider permanent insurance inside your insurance trust instead of only term, and instead of insurance owned outright. Example: Set up an insurance trust ("ILIT") to own permanent insurance funded up to the maximum you can without affecting the tax structure of the policy (MEC limit). Your spouse can be a co-trustee and beneficiary and can access the cash value of the policy in future years if needed. Insurance protects your spouse and children and has a strong non-asset protection motive. ◙ Re-title your house. Tenants by the entirety has a measure of protection from claimants. A qualified personal residence trust (QPRT) is another approach that in appropriate circumstances may provide greater protection. When using a QPRT you transfer your house to a special trust, QPRT, for a term of years (say 20) after which your heirs (or a trust for their benefit) owns the house. Downside - the value of the house will not be available to you in retirement. ◙ Have a large umbrella (personal excess liability) insurance policy. Be certain it is properly coordinated with your automobile and homeowners' policies. This is vital to protect against other liability risks (asset protection planning is NOT only about malpractice risks, it's about all identifiable risks you can address). ◙ Use your prenuptial agreement to create asset protection benefits. ◙ Have your spouse create trusts in his will for your benefit that restrict, to the extent permitted by the tax laws, distributions to you. Example: A bypass trust for your benefit should include children as beneficiaries, a sprinkle power in the trustee (the right to distribute assets to any one of several beneficiaries in the trustee's discretion) and totally discretionary distribution standards.
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