Common myths, misconceptions about asset protection may hold back your planning
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As advisors to physicians throughout the U. S., we often learn what misconceptions physicians have regarding how to protect their assets from potential lawsuits. In this article, I hope to dispel some incorrect assumptions you may have.
Asset protection is a planning area that aims to shield a client’s assets from future potential liability. As we have discussed in other articles, this area should include three different disciplines: insurance, legal and financial.
Why asset protection is important
The reality of any area of medical practice in the 21st century includes the potential for lawsuits and liability. While medical malpractice may be top-of-mind, there are a host of liability risks beyond malpractice, depending on one’s practice environment. These include employee claims, fiduciary liability for the practice retirement plan, premises liability and HIPAA violations, as well as potential personal liability for rental properties, car accidents (for self and children), outside businesses and personal guarantees.
For these reasons, nearly all physicians have engaged in some type of asset protection planning, whether they called it such or not. Unfortunately, many physicians may have limited their planning, or even ignored it completely, because they believe common misconceptions about the area. Here, we list some of the most common “asset protection myths” and attempt to dispel them.
Myth #1: “My assets are owned jointly with my spouse or by my spouse alone, so I’m OK.”
Most married physicians hold their homes and other property in joint ownership. Unfortunately, this ownership structure provides little asset protection in most states.
In community property states, community assets will be exposed to community debts regardless of title. Community debts include any debt that arises during marriage as the result of an act that helped the community. Certainly, any claims resulting from a medical practice, an income-producing asset (rental real estate) or an auto accident would be included.
Even in non-community property states, joint property is typically at least 50% vulnerable to the claims against either spouse. Therefore, in most states, at least 50% of such property will be vulnerable — and all of the other problems associated with joint property still exist in non-community property states. The exception here is in states that have tenancy by the entirety (TBE), which we have discussed in other articles.
In most states, having the nonvulnerable spouse own title to the couple’s assets does not protect the asset. The creditor is often able to seize assets owned by the spouse of the debtor by proving that the income or funds of the debtor spouse were used to purchase the asset. To determine if the asset is reversible, three questions can be asked:
- Whose income was used to purchase the asset?
- Has the vulnerable spouse used the asset at any time?
- Does this spouse have any control over the asset?
If the answer is “yes” to any of these questions, then the creditor may be able to reach these assets.
Myth #2: “I am insured, so I’m totally covered.”
While we strongly advocate insurance as a first line of defense, and a fundamental part of any asset protection plan, an insurance policy is 50 pages long for a reason. Within those numerous pages are a variety of exclusions and limitations that most people never take the time to read, let alone understand. Even if you do have insurance and the policy does cover the liability in question, there are still risks of underinsurance, strict liability and bankruptcy of the insurance company. In any of these cases, you could be left with the sole financial responsibility for the loss. Lastly, with losses that fall within the plan’s coverage limits, you still may see your future premiums go up significantly.
Myth #3: “I can just give assets away if I get into trouble.”
Another common misconception regarding asset protection is that you can simply give away or transfer your assets if you ever get sued. If this were the case, then you could just hide your assets when necessary. You wouldn’t need an asset protection specialist. You would only need a shovel and some good map-making skills so you could find your buried treasure later.
Recognizing the possibility that people may attempt to give away their assets when facing liability, there are laws prohibiting fraudulent transfers, which is also called fraudulent conveyances or voidable transfers. In a nutshell, if you make an asset transfer after an incident takes place (whether you knew about the pending lawsuit or not), the judge has the right to rule the transfer a fraudulent conveyance and order the asset to be returned to the transferor, thereby subjecting the assets to the claims of the creditor. The law can even allow this result if the transfers were made before the incident of liability, if it were reasonably foreseeable (eg, making transfers knowing you may soon default on a loan, even though the default hasn’t occurred yet).
If you have been sued or suspect that you may be sued, there may be significant limitations to protection. Typically, reactive last-minute strategies are not effective and may be more expensive than the highly successful strategies that can be implemented when there is no reasonably foreseeable claim.
Myth # 4. “An asset is either protected or not.”
The most common misconception among physicians regarding asset protection is the idea that an asset is either “protected” or “unprotected.” This “black or white” analysis is no more accurate in the field of asset protection than it is in the field of medicine. In fact, asset protection advisors are similar to physicians in how they approach a client or patient.
Like a physician who judges the severity of a patient’s illness, asset protection specialists use a rating system to determine the protection or vulnerability of a client’s particular asset. The sliding scale runs from -5 (totally vulnerable) to +5 (superior protection). As you have probably already guessed, our goal is to bring a client’s score closer to (+5) for each of their assets.
The sliding scale’s lowest and highest values are straightforward and agreed upon by advisors in the field. Assets owned in one’s own name, where no exemption applies, are totally vulnerable to claims (-5). State or federally exempt assets are totally shielded, as are irrevocable trust assets in the right circumstances, so long as fraudulent transfer laws are not implicated. Between the extremes of -5 and +5, the protection degree is more variable, as there may be significant variability in state law. In the middle of the scale, experts in the field may disagree on the exact protection level or which tool is best among options.
Conclusion
In today’s litigious environment, asset protection should clearly be part of any physician’s financial plan. Before implementing proactive tools in the insurance, legal and financial disciplines, it is important to first dispel common misconceptions about the planning area itself.
Reference:
Wealth Planning for the Modern Physician and Wealth Management Made Simple are available free in print or by ebook download by texting HEALIO to 844-418-1212 or at www.ojmbookstore.com. Enter code HEALIO at checkout.
For more information:
David B. Mandell, JD, MBA, is an attorney and founder of the wealth management firm OJM Group www.ojmgroup.com. You should seek professional tax and legal advice before implementing any strategy discussed herein. Mandell can be reached at mandell@ojmgroup.com or 877-656-4362.
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