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Aim for the best, plan for the worst: Protect against malpractice liability
by Sanjeev Bhatia, MD; and David B. Mandell, JD, MBA
Many experienced physicians, at one time or another, have worried about being sued for malpractice (or another risk) because of a bad patient outcome or something similar that a colleague of theirs experienced. Millennial physicians would be wise to recognize that all areas of medicine have inherent personal liability risks and take reasonable steps to mitigate and protect against such risks.
We discuss two approaches to address malpractice liability: risk management and asset protection.
Risk management
The first and most obvious strategy to protect against malpractice liability is to reduce risk and practice the best medicine possible. This begins with a dedication to being the best physician you can be, developing ongoing knowledge through education and CME, maintaining a general approach to meeting the medical standard of care expected in your specialty, and cultivating empathy and rapport with patients.
Beyond this patient care-related approach, doctors would be well-served to incorporate nonspecialty-specific risk management techniques into their practices. These include learning how physicians, as well as staff members, can best communicate with patients, especially difficult patients or when dealing with bad outcomes. Physicians should also consider implementing methods for handling protected health information, adhering to constantly changing HIPAA regulations and managing risks of communication technology, from blogs and websites to texting and email.
Asset protection
Regardless of how many risk management courses you take or how carefully you practice, mistakes will occur. Human error cannot be eliminated from the equation. Moreover, sometimes bad outcomes will occur even when all best practices were followed. Occasionally, bad outcomes can lead to potential liability even if the physician believes he or she did nothing wrong. Certainly, our legal system is not perfect, and predicting liability is not an exact science.
Given this, many physicians have chosen to buttress risk management for their practice with asset protection planning.
Asset protection planning has a simple goal: To position a client’s assets in such a way that makes it difficult, and in certain cases nearly impossible, for a potential, future lawsuit plaintiff to have access to them. A well-executed asset protection plan helps physicians feel more secure and sleep better at night knowing they will not lose what they have worked so hard to build.
Asset protection: A matter of degree
A fundamental concept physicians should understand about asset protection planning is that it is a discipline of degrees and is not a black/white, vulnerable/protected analysis. In fact, we use an asset protection rating system (see accompanying chart) for a client’s overall situation that ranges from -5 (totally vulnerable) to +5 (superior protection). The goal of this rating system is to move as much of the physician’s wealth as possible from the negative vulnerable positions to the higher positive protected positions. Ideally, this should be done with as little cost and interruption as possible.
Tools to shield personal assets
Personal asset protection encompasses shielding a physician’s home, retirement accounts, other investment accounts, second home or rental real estate, and valuable personal property
We typically recommend leveraging your state’s exempt assets as a priority, because they provide the highest level (+5) of protection and involve no legal fees, state fees, accounting fees or gifting programs. In other words, you can own the exempt asset outright in your name, have access to its value and still have it 100% protected from lawsuits against you.
Each state law has assets that are absolutely exempt from creditor claims, thereby achieving a +5 status. Many states provide exemptions for qualified retirement plans and IRAs, cash within life insurance policies, annuities and primary homes. Make sure you seek an asset protection expert to find out the exemptions that apply to your situation.
In some states, tenancy by the entirety can be a valuable ownership form for married physicians, as certain assets in such states are protected completely from a claim against only one spouse. About 20 states have tenancy by the entirety protections for some type of asset class. Like exemptions, the rules vary widely among the states, and expertise should be sought.
Beyond exempt assets and tenancy by the entirety, basic asset protection tools like family limited partnerships (FLPs), limited liability companies (LLCs) and certain types of trusts should be used. FLPs and LLCs provide good asset protection against future lawsuits, allow for maintenance of control by the LLC/FLP manager or general partner (typically the physician and/or spouse) and can provide income and estate tax benefits. Specifically, these tools will usually keep a creditor outside the structure through “charging order” protections, which typically create enough of a hurdle for creditors to allow the physician to negotiate a favorable settlement. For these reasons, we often call FLPs and LLCs the “building blocks” of a basic asset protection plan.
Many types of trusts also provide significant protection for physicians. These can range from life insurance trusts or charitable remainder trusts to grantor-retained annuity trusts and domestic asset protection trusts. Each type of trust has pros and cons, as well as costs and benefits to consider. It is important to understand that only irrevocable trusts provide asset protection benefits. While revocable trusts are valuable for estate planning and incapacitation planning — and many doctors have implemented such trusts for these reasons — they do not provide any asset protection benefits, at least as long as you are alive.
For all FLPs, LLCs and trusts, the asset protection benefits rely on proper drafting of the documentation, proper maintenance, and respect for formalities and proper ownership arrangements. If all of these are in place, a physician can typically enjoy solid asset protection for a relatively low cost.
Practicing medicine in any specialty has inherent lawsuit risks, primarily from medical malpractice. Risk management and asset protection planning go hand-in-hand to help physicians reduce their risk of liability and protect them in case a liability occurs.
- Reference:
- For Doctors Only or Wealth Management Made Simple are available free in print or by e-book download by texting HEALIO to 555-888 or at www.ojmbookstore.com. Enter code HEALIO at checkout.
- For more information:
- Sanjeev Bhatia, MD, is an orthopedic sports medicine surgeon at Northwestern Medicine in Warrenville, Ill. He can be reached at: sanjeevbhatia1@gmail.com.
- 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. He can be reached at mandell@ojmgroup.com or (877) 656-4362.
Disclosures: Bhatia and Mandell report no relevant financial disclosures.
