Use ‘tenancy by the entirety’ to protect assets

Key takeaways:

• About 20 states provide for tenancy by the entirety.
• Physicians in the remaining states cannot consider this tool.

Physicians in any specialty should realize that mistakes will happen in medicine, and bad outcomes will occur, even when all best practices are followed.

Bad outcomes can lead to potential liability even if the physician believes he or she did nothing wrong. In addition, physicians can face potential liability for nonmedical risks in practice (ie, employee claims, HIPAA violations, slip-and-falls) and in their personal lives (ie, landlord liability, business deals gone south, auto accidents). For these reasons, many physicians choose to engage in asset protection planning.

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The purpose of asset protection planning is to position a physician’s assets in a way that makes it difficult — and in certain cases nearly impossible — for a potential lawsuit plaintiff to gain access to them. If a physician aims to feel more secure knowing that they will not lose what they have worked hard to build, then asset protection planning is an important step toward achieving that goal.

In some states, the ownership form for married couples called “tenancy by the entirety” (or “TBE”, for short) can be an effective — and free — asset protection tool. Before you understand what TBE is and how it works, we should put it in perspective.

Objectives of asset protection planning

Discouragement. Owning assets in protected rather than exposed positions may discourage a claim from the outset, as it may appear to a potential claimant that it will be too difficult or costly to pursue assets.

Settlement. If a claim does arise, the costs and uncertainty involved in pursuing assets in protected positions will often encourage a claimant to settle on favorable terms rather than pursue a lawsuit to a judgment.

Protection. If the claimant does pursue litigation to get a judgment, they will have fewer rights (in some cases, no rights) to assets, depending on their position.

Sliding scale of asset protection

The most common misconception physicians have regarding asset protection is that an asset is either “protected” or “not protected.” An experienced asset protection specialist will explain that a doctor’s personal and practice assets are each protected (or at risk) in varying degrees. As a physician diagnoses a patient, the asset protection specialist will assess each asset’s current level of protection, and recommend ways to improve protection and reduce the risk of exposure to liability.

To categorize a physician’s personal assets, we use a sliding scale (see Figure) as a rating system to determine the protection or vulnerability of a particular asset. The sliding scale runs from (5) (totally vulnerable) to (+5) (superior protection). The goal of asset protection planning is to bring a physician’s score closer to (+5) for each of their assets, although it is not feasible to get to (+5) across the board.

In the Figure, you see that state and federal exemptions are given the highest (+5) rating. These assets are totally protected from typical lawsuits and creditor claims, as long there is no timing issue involved (ie, typically, that they were acquired after the claim at issue was “reasonably foreseeable”). As such, leveraging exempt assets is a large part of asset protection planning. However, even in the most protective states, like Florida, exemptions are limited and do not cover all of a physician’s common assets. As two examples, no states provide exemptions for personally owned securities (stocks/bonds, funds, etc.) or non-home real estate.

To shield such assets effectively, many physicians implement legal tools such as limited liability companies (LLCs) and various types of trusts. We have covered these tools in other Residency to Retirement articles. In addition to these legal tools, TBE is an ownership form available for married couples in nearly 20 states.

TBE: A quasi-exempt asset

In the Figure, TBE is categorized as a (+1) to (+3) protector. A more accurate categorization might be a (+5) exempt asset, but only in some circumstances. In essence, when married couples in specified states own certain types of assets in TBE, those assets are totally shielded from lawsuits and creditors against only one spouse. In these cases, TBE can be extremely effective and inexpensive, if not totally free. However, there are limitations. Let’s dig in a bit on these limitations.

• Only specified states. Only about 20 states provide for TBE. Physicians in the remaining states, therefore, cannot even consider this tool.
• Only certain assets. In many of the 20 states, the only asset class that is protected by TBE is real estate. Further, in a subset of states, TBE only applies to the married couple’s primary residence, and second homes or investment properties cannot get the protections. In other states, like Florida, TBE can protect both real estate and personal property – such as investment accounts. This provision, obviously, is very powerful.
• Joint claim risk. In the states where it can be used, TBE provides no shield whatsoever against joint risks, including lawsuits that arise from jointly owned real estate or acts of minor children imputed to both parents (ie, auto accidents).
• Divorce risk. In the states where it can be used, if a couple gets divorced, all protections from TBE are eliminated. The liable spouse would then have their personal (formerly TBE assets) exposed to claims.
• Survivor risk. In the states where it can be used, if one spouse dies, all protections from TBE are eliminated. The liable spouse would then have their personal (formerly TBE assets) exposed to claims.

TBE practical tips

TBE is a creature of state law, so the requirements to get TBE protections will vary by state. In some states, as long as the asset is owned jointly and the couple is married, TBE protections apply. In others, the deed or account must include the words “tenancy by entirety,” or “TBE” for the protections to apply. Guidance from asset protection experts is crucial here.

Conclusion

Many physicians are concerned about potential exposure of their hard-earned assets and turn to asset protection planning to shield their wealth. For many physicians, TBE can be a cost-effective part of this planning.

For more information:

David B. Mandell, JD, MBA, is an attorney and co-founder of the wealth management firm OJM Group (www.ojmgroup.com). He can be reached at 877-656-4362 or mandell@ojmgroup.com.

Mandell and OJM Group partners are pleased to announce the publication of their newest book, Wealth Strategies for Today’s Physician: A Multi-Media Playbook. The playbook’s innovative format features more than 90 links to videos and podcast episodes to enhance important financial topics for physicians. To receive a free print copy or ebook download, text HEALIO to 844-418-1212, or visit www.ojmbookstore.com and enter code HEALIO at checkout.