In my last column, I identified the single biggest mistake most doctors make with their asset protection planning, failing to act and the significant additional legal jeopardy they incur when trying to plan after the fact. A similar bad legal move we have consistently seen doctors make either at the advice of “promoters” selling "Do it Yourself" legal kits and books online or at dinner seminars or when doctors themselves panic after a crisis and try to implement last-ditch strategies themselves.
Giving, Gifting and Transferring Away Your Wealth: Is your gift legally effective and complete?
Again, the first caveat is always timing. Gifting assets to others, either directly or through a legal structure like a trust, can be a valid and defensible asset protection strategy when done right, in accordance with tax laws and assuming it is not done as a reaction to a specific exposure. There are, however, a number of very significant details in employing this kind of strategy in an effective and legal way that most doctors overlook.
Any gift individual gift of cash or other assets with a “fair market value” of over $14,000 to a non-spouse recipient should be documented with a gift tax return as outlined in I.R.S. guidelines. Failing to document the gift this way can lead to several equally bad outcomes. First, you can be in a position of having committed tax fraud by not following the guidelines and failing to adequately and legitimately value and report the gift. Second, the gift you are relying on for this purpose may be deemed legally defective by the courts and your creditors, since you never executed the formalities the law requires to make the gift legally complete.
This along with other incidences of control, possession, or title to the gifted assets never having legally left you will likely lead to the assets being considered “yours." Merely saying, “Those are her assets and I don’t own them” or simply titling assets that were purchased with marital funds in your spouse’s name, especially in a community property state, without some formal written marital property separation, pre-nuptial or ante-nuptial agreement executed well in advance of an exposure is also most often an ineffective defense.
Are you just “swapping” liability?
Many doctors feel that gifting assets to their spouses, children or other relatives is asset effective protection, I disagree. While it may be a legally effective transfer away from you and your direct personal or professional liability if you observe all the caveats I’ve provided above, no serious legal professional in my business would rely on such a strategy. One big problem with it is that you have simply exchanged your personal liability for that of another person. The argument from physicians is that they feel they are transferring assets to someone with lower liability than they have, typically a non-physician spouse or family member.
While it may be true that that person does not have your specific professional liability, they typically have some significant liability of their own for common activities like driving a car, owning a home, engaging in their own professions and business transactions, etc. Transferring assets directly to such a person, in their own name and control (as opposed to a trust or other appropriate legal structure), simply swaps your liability for theirs. So for instance in one case we saw, the transfer of a physician’s seven figure home to the family’s college aged child proved to be disastrous when that young man was involved in a fatal car accident and a very aggressive (and well deserved) seven-figure lawsuit for his negligence followed. The young man’s only real asset was, you guessed it, his parent’s seven figure dream home that was paid for and which also was a significant part of their retirement savings plan.
Finally, remember that you have made a real gift. Many doctors make these transfer with a wink and the belief that it’s not a real gift, it is. That means if your spouse or relative leaves you, becomes estranged, encumbers the property with debt, loses it in a business deal of their own, etc. you are out of luck and have no legal recourse nor have your moves substituted for experienced legal counsel that could have made a difference.