As we have discussed here multiple times in the past, the most effective wealth preservation planning has four key components: tax planning, legal planning, investment planning, and insurance planning. Fortunately more advisors from different disciplines are adopting a more holistic view of their clients and educating themselves in a variety of areas outside their own primary practice area in order to be of greater value and part of a real team.
Unfortunately, misinformation, bad habits, and “wives tales” continue to plague doctors and create or ignore serious financial exposures.
The following bad advice comes from a variety of sources, including CPAs, financial advisors, and, perhaps most shockingly, estate-planning and general business attorneys who have handled foundational planning for physicians and are often just reluctant to admit that they overlooked an area of planning.
1. You’re not risky enough to worry about asset-protection planning. This common bad advice plays into the idea that the risk picture you have of yourself is accurate or complete. We all have a specific “risk picture” and things we consider to pose the greatest risk to ourselves and our assets; that picture is distorted. My experience over the last ten years as a defensive planner is that while we must plan against the most obvious and likely exposures, it is most often the issue we never thought of that will create the biggest exposure. This includes the medical malpractice exposure doctors face, as we have explained in past discussions financial exposures and employee lawsuits have been much more frequent sources of serious and recurring exposure.
2. You have a big umbrella policy; you don’t need anything else. I recently met with a couple in their 60s that had married later in life. Each of them had been previously married, successful, and brought their own children and substantial assets to the relationship, north of $5 million each. After a review we discovered that the retired physician had, as one of his investments, a nutraceutical company that he closely held, managed and for which he formulated products.*
We prescribed a system of legal tools and specific risk management measures. The result would have been to reduce their collectability from seven figures each to less than $200K each. Upon review of the suggested plan, both their CPA and estate planner felt that they were low risk and did not need any measures in place beyond the liability insurance and seven-figure umbrella policy they had in place.
While I fully agree that umbrella is a good idea, it is the height of naïveté to think that a personal liability umbrella, no matter how high the limits are, would be adequate to cover risks we’ve previously covered in areas like employment lawsuits, events of data breach, and liability related to their roles as directors and officers of corporations, which we covered in detail last week. However, because the couple and their advisors could point to no immediate, specific known threat, they chose to remain unprotected, with the sum of their lives’ work exposed to any twist of fate. The essential problem? If they are wrong it is doubtful that they will be able to replace 40 years of work given their age the prevailing economic conditions.
While this list is not complete it identifies the basic underlying issues and attitudes that are allowing this misinformation to spread. The idea is simple; we can't predict where, if ever, an exposure will occur for any particular individual, so you must aggressively plan and defend yourself against as many risks as reasonably possible while you still have an opportunity to do so.
Consider this simple analogy. Almost every person reading this has liability insurance that includes coverage for fire damage to their home, yet when I ask rooms full of doctors across the country how many of them have ever had a house burn down I’ve never seen more than a single hand raised. The number of hands in the air when I ask how many people have ever been involved in lawsuit of any kind is substantially higher.
*minor identifying details changed.