In the first part of this series, I explore a recent encounter that illustrates common mistakes many physicians still make in protecting their wealth and managing their risks.
Mistake 1: Failing to adequately insure
This mistake takes many forms and applies to both personal and professional liabilities. Insurance is the most predictable and cost-effective layer of defense. I’ve previously examined both the insurance basics every physician must understand as well as the details of some very specific types of commercial liability insurance.
I was recently contacted by a medical practice owner* in the Pacific Northwest. She was concerned after being in an auto accident in which the other party suffered several serious injuries, one of which may be permanently debilitating. Her insurance carrier informed her that her liability will almost certainly exceed the limits of her automobile insurance policy, so she called me after her CPA told her, “You should get some asset protection planning.”
My first, and most obvious question, was about her insurance coverage and what her limits were. She told me they were $250,000. I asked why, as a professional with significant assets, she didn’t have a seven-figure umbrella policy. She referred to a common piece of exceptionally bad advice I routinely see doctors giving each other on social media, namely that, “Too much insurance makes you a target and means you’re more likely to get sued.”
This is ridiculous for several reasons. If you incur a significant liability, are not adequately insured for any particular risk and have exposed personal assets, the plaintiff’s counsel will discover those assets. This includes your income, home equity, investment assets and the income streams any of those assets produce. The plaintiff’s lawyers will take those assets from you to collect their full judgment. That money now belongs to the plaintiff’s lawyers, too.
Higher insurance limits provide greater defense coverage and reduce the probability that your personal assets will be at risk by covering more claims. Lower insurance limits mean that even if the policy pays its full limits, there will almost certainly be a real claim above coverage limits against you personally. This is a claim that you could have been protected against but instead chose to be uninsured or underinsured.
Mistake 2: Acting late
As an attorney, I both ethically and legally had to decline to help this physician protect her assets based on both the timing of the call, after the exposure itself and specific notice that her coverage would be inadequate.
She argued that she should still be able to protect herself since she hadn’t actually been sued yet and there was no guarantee she actually would be. I again declined and explained that acting late against a known exposure has some very specific problems in the eyes of the law.
Acting to delay, hinder or defraud a known or potential creditor is referred to as fraudulent conveyance and would predictability result in a voidable transaction.
In plain English, you don’t have a right to reduce your assets by setting up and transferring them to a trust, LLC or similar legal structure. If you do, the court will invalidate the transaction and take the assets anyway. This prohibited transfer includes both trying to give them away to a spouse or other relative as well as sham sales and liens involving third parties, a popular tactic among amateurs.
Making such a transfer with the obvious fraudulent intent outlined above is both civilly and even criminally actionable by a plaintiff. Courts in 18 states have elevated this criminal liability up to the level of a felony.
The legal barriers to acting against existing exposures is not a limitation of any specific type of legal structure. Rather, it’s the black letter of the law everywhere. There are no special secret exceptions or magic trusts that evade these limits. Any attorney who says otherwise is either dangerously ignorant or dishonest and also risks his own personal liability for aiding you in committing fraud.
Acting late, in an attempt to avoid a specific creditor, is also the main exception to the legal creditor protection afforded by some state statues to qualified plans like IRAs and the cash value of life insurance and annuities.
I will continue my examination of other specific risks and errors in my next column.
*Note: Non-material identifying details have been changed to protect the individual’s privacy and confidentiality.
Ike Devji, JD, has practiced in the areas of asset protection, risk management and wealth preservation law exclusively for the last 15 years. He helps protect a national client base with more than $5 billion in personal assets that includes several thousand physicians. He is a contributing author to multiple books for physicians and a frequent medical conference speaker and CME presenter.