Many of the issues and case studies we have discussed on physician asset protection planning in the age of decreased earnings and unlimited liability may seem daunting and complex. Fortunately, not all the moves you can make require a great deal of time and expertise to address. Here are some small simple issues that every physician can act on by themselves today with little or no cost as a first step to being free from fear.
Do something today.
The number one most important rule of asset protection is that timing is king. Think of it like insurance, which is effective only when implemented in advance of the exposure.
Buy more insurance.
We talked about why insurance alone is not adequate protection in the past, but it is and always should be your first line of defense. Have both personal and professional policies at maximum reasonably affordable limits and then have general liability umbrellas on both. The cost of both umbrellas is typically less than the cost of retaining defense counsel on even a single small exposure.
Maximize your “incidental” asset protection.
Every state has limits on the baseline assets it protects for your family by law, often found in your state’s bankruptcy statues. Make sure you maximize the assets you have in each of these protected categories where practical. These protections are based in the law of your state and are typically supported by a great deal of precedent and case law.
Common protected assets include:
Life Insurance: Understand your state’s protection for the cash value of life insurance. It’s something you likely have, need or want, regardless of whether you enjoy paying for it or not. Given the high allocation to cash most physicians have right now because of instability in the stock and real estate markets this is an increasingly important issue. Make sure that your polices are owned and have named beneficiaries that are protected by statute. For instance, Arizona protects life insurance cash values to full cash value, but only if owned by an individual and when the owner’s dependents are beneficiaries. This small detail dictates whether the money is safe or not.
Homestead: Every state has a “homestead” provision of some type that dictates how much of your equity is protected from creditors including bankruptcy, an increasing concern for physicians. Make sure you know your state’s limits and how much of your home’s equity is exposed or how much “room” you have to bank money up in your home. Be aware of how you hold title and the specific requirements most states impose to get this legal protection. Doing it wrong could cost you your home.
Fund Retirement Plans: Plans with heavy protection include IRAs in their many forms, ERISA-qualified plans, and defined contribution and defined benefit plans. Analyze what portion of your investment assets are long term and allocate as much as possible to those plans. While the laws and their application regarding the safety of these assets vary from state to state most are protected to about $1 million. Ask your financial advisor to explain the limits of these plans in your state. I like them because, again it’s the law and the protection is well established and typically vests quickly. As just one example, IRA contributions in some states are bankruptcy remote after as little as 120 days but remember the timing issue; you can’t establish and heavily fund these plans at the eleventh hour after getting in trouble as defensive planning. That’s known as a fraudulent conveyance or transfer and is the one exception to these laws in most jurisdictions.
Watch Your Annuities: Many doctors purchased annuities due to high guaranteed returns over the last decade. In many states the cash value of the annuities and even the proceeds may be protected. Many of those high return annuities are maturing in a much lower return environment and physicians are looking for places to put money that was earning as much as a guaranteed 7 perent and re-allocating those funds away from annuities which now have much lower returns. Make sure you exhaust your examination of the other available legally protected alternatives (including rollovers) before allocating protected assets to something that may have higher returns but which will also be exposed to a lawsuit. Make your financial advisor do the work; it is part of what they are paid for.
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