A properly structured asset protection plan employs commonly used structures in a manner that legally, ethically and effectively shields a physician’s assets from any lawsuit and any creditor. Asset protection planning is only successful if it is enacted before an event has occurred that could result in a creditors’ claim or lawsuit. While an insurance policy is always a physician’s first line of defense and part of virtually every asset protection plan, it is important that physicians focus on additional methods of protecting their assets. Here are a few suggestions of ways that you, as a physician, can protect your assets from claimants and creditors.
Consider Various Trust Arrangements. Not all trusts provide asset protection. A revocable trust permits the physician to place assets in a trust while maintaining control over the disposition and use of the assets. While this type of trust is advocated by estate planning professionals as a means by which to reduce the cost of probate upon death, a revocable trust does not provide significant asset protection during the life of the physician. Most courts will permit claimants and creditors to reach the assets in a revocable trust. An irrevocable trust, if properly drafted, will operate to protect the assets of the physician from the claims of litigants and creditors. In the case of an irrevocable trust, the physician must relinquish control over the assets, but the trust can be drafted in such a manner that permits the physician some element of indirect control.
Offshore Trusts. In select situations, an offshore trust may be an appropriate component of an asset protection plan. However, US resident physicians should understand that the use of an offshore trust does not provide any income tax savings. US citizens and residents are subject to tax on their worldwide income.
Due Diligence and Sound Judgment. While not typically considered as part of an “asset protection” plan, due diligence and sound judgment are essential components of wealth preservation. Successful physicians often qualify as “Accredited Investors” under securities laws. As a result, physicians are often presented with opportunities to participate in various transactions, joint ventures and private investments. The purpose of any asset protection plan is wealth preservation. The decision to participate in a transaction or investment should be made only after careful consideration of all the risks and potential liabilities.
Choice of Entity. If a person begins a business without incorporating it, then all of his or her personal and business assets will be at risk for all debts and claims against the business. This is also the case if two or more people run the business as a general partnership. To help protect a physician’s personal assets from the risks of the business, an asset protection form of ownership needs to be utilized.
The most basic asset protection device is the formation of limited partnerships, limited liability companies, and professional corporations. The transfer of assets to one of these types of entities provides significant asset protection, since most states prohibit the physician’s personal creditors from gaining access to the assets of these types of entities.
Marital Property Agreements. While it is unfortunate, divorce has become commonplace. It is admirable for a physician to trust his or her spouse. However, it may be prudent to include a pre-nuptial agreement, or even a post-marital property agreement, as part of an asset protection plan.
Focus on Your Principal Residence. No asset is more important to shield from creditor claims than a personal residence. Personal residences represent the bulk of many people’s fortune. In Texas, your principal residence, or "homestead,” is exempt from seizure by creditors.
Maximize Contributions to IRA's and other Qualified Plans. Assets in IRA's and qualified employee benefit plans are generally awarded special protection from creditors and claimants. Many plans, including 401(k)’s, are also protected in bankruptcy because they are not considered part of a bankruptcy estate. The Bankruptcy Abuse and Protection Act of 2005 limits the IRA exemption in bankruptcy to $1,000,000 adjusted for inflation.
From an asset protection perspective, one of the best types of planning involves certain advanced benefit plans, such as Section 419(e) Welfare Benefit Trusts or Section 412(i) Defined Benefit Plans. The attractiveness of these plans is that since they are created for the benefit of the employees and not the owners, the assets in these plans should not be available to creditors of the business. Because of these benefits, the use of a qualified plan may make sense for physicians. A physician can simultaneously reduce his or her annual income tax paid since contributions to these plans are normally made pre-tax.
Consider Life Insurance and Annuity Strategies. In many states, including Texas, life insurance policy proceeds and cash values received from life insurance policies are protected from the claims of creditors. Additionally, policy proceeds from annuities are wholly exempt from all creditors. If a physician is interested in purchasing life insurance, careful consideration should be given to putting the life insurance policy in an irrevocable life insurance trust (“ILIT”). If an insured dies owning a life insurance policy, the proceeds of the policy will be in included in his or her taxable estate (assuming there is a federal estate tax at the time of the decedent’s death). However, if the life insurance is owned by a trust, the value of the policy is excluded from the decedent’s taxable estate.