Protecting what you've worked for starts with having the right malpractice insurance, but it doesn't end there. Here's how to mitigate risks coming from all directions.
Riding out Nevada's long battle over malpractice-related tort reform gave Kenneth Misch some perspective on risk management.
He nearly had to close his pediatrics practice a decade ago when malpractice insurance premiums surged, even though pediatrics is considered a relatively low-risk specialty. Those spikes subsided after his state put caps on certain damages, but still drove home the need for protecting himself against all kinds of threats.
Beyond malpractice insurance, Misch has created separate trusts for certain types of property, purchased umbrella insurance, and done basic estate planning in addition to buying life and disability insurance.
"We know and try to educate our residents that they have to do all those things, in addition to practicing very good medicine and spending the appropriate time with patients," he says.
Given declining reimbursements, practice buyouts by hospitals, and lower salaries, it might be tempting to put asset protection on the back burner, but experts argue it's even more important today. "Because doctors are earning less, keeping every dollar is a bigger part of planning than ever before," says Ike Devji, a Phoenix attorney with Lodmell & Lodmell P.C., who is also executive vice president of the Wealthy 100, a wealth management firm. "If you are earning less you must keep more, so you need a defense against active threats like a lawsuit and passive threats like investment losses and taxes."
Proper asset protection begins with malpractice insurance, but it doesn't just end there. In fact, just getting malpractice insurance and doing nothing else exposes physicians to a higher than normal rate of lawsuits and other risks coming from all directions. And given today's practice economics, mitigating those risks is more important than ever.
Start with good insurance
Speaking to a group of physicians at a conference recently, Devji says an attendee, who is an ENT surgeon, mentioned he's had the same $1 million malpractice insurance policy for 32 years.
However, it's important to keep in mind that "everything has been adjusted for inflation except malpractice coverage," says Devji. So a $1 million policy might not be enough. As malpractice awards have risen substantially, few physicians have the resources to come up with them out of pocket. That's why it's so important to carry plenty of malpractice coverage, in addition to other asset protection strategies, he says.
Be sure to know the difference between the two major types of malpractice coverage: occurrence-based and claims-made: With occurrence-based policies, you are covered for work while the policy was in effect, no matter when the claim is made. Claims-made policies - far more common today - cover only claims made during the term of the policy, so you need additional tail coverage when the policy ends.
And if you need it, be sure you have tail coverage when you leave a practice.
Where to begin on the other types of protection? Start small, experts say, with a few low-cost and relatively simple extras.
In addition to adequate malpractice coverage, make sure you have an adequate umbrella insurance policy, which covers assets above and beyond the traditional limits of personal home and auto policies, says Marc Lion, managing partner with Lion & Company CPA's LLP in Syosset, N.Y.
"Everyone assumes physicians have money, so at least do the simple stuff," he says. An annual policy that includes up to $5 million in coverage can be found for a few hundred dollars, well worth the investment, he says.
As you are checking out insurers, be sure to know their rating by agencies such as A.M. Best. Also, be aware of how the insurer is organized. Is it a for-profit company beholden to stockholders or a mutual insurance provider owned by policyholders?
Finally, don't just compare on price. Consider deductibles, any possible gaps in coverage, and discounts for customers with a good track record.
Beef up retirement for all
Next, fund your retirement accounts to their maximum levels to take full advantage of their powerful combination of credit protection and tax deferral.
Basic IRAs and 401(k) plans can be set up relatively inexpensively, compared with elaborate trusts and complex insurance products. SEP-IRA plans carry fewer administrative rules and costs than 401(k) plans. For 2012, participants can sock away up to $50,000 in these plans.
Check out the parameters on the IRS website at http://1.usa.gov/HkrDd5.
Late-career physicians might want to check out individual defined benefit pensions, which allow for very high contributions into pensions with creditor protection. And if you offer a 401(k) plan through your practice, you can get a third benefit, says Lion: keeping good employees.
"Sometimes your best assets are your people, so you want to promote [employment] longevity with a plan that's attractive to other physicians who are your employees or your staff," he says. "If you can work in an attractive package and at the same time get a tax benefit, that makes sense all around."
Protecting other property
While your retirement accounts come with creditor protection built in, you'll now need to consider how to protect other property, such as cars, boats, taxable savings accounts, and homes.
In this case, one vehicle doesn't fit all, Devji says.
In other words, creating a single legal entity to hold all your assets sounds simple and easy to manage, but doesn't make any sense for someone trying to protect himself from lawsuits, he says.
Family Limited Partnerships and Limited Liability Companies are used to protect assets from potential creditors, but be sure to work with an experienced attorney and ask lots of questions about why each asset is going in each FLP or LLC, experts say.
For example, putting a home inside one of these legal entities can strip away the owner's ability to take the mortgage-interest tax deduction, Devji says.
Also take care not to link these legal entities to your practice, and of course set them up long before there is any hint of a possible lawsuit, or the entire deal could be considered fraudulent, he says.
What about offshore accounts, in light of federal efforts to crack down on foreign assets that are considered tax dodges?
"The legitimate use of offshore trusts was never to shelter money from income tax," says Greg Herman-Giddens, president of TrustCounsel in Chapel Hill, N.C. Filing correct tax returns that disclose all foreign assets should preserve the liability protections of offshore accounts without running into IRS trouble, he says.
Asher Rubenstein, a New York asset protection attorney, also says he's continuing to use offshore entities.
"Some physicians are putting on belts and suspenders," he says, using liability protection plans both domestically and internationally to cover all bases. "We're not suggesting sending money out of the country to hide it" from the IRS, he adds.
Finally, experts say, make sure your advisers are creating asset-protection plans that mesh with your estate planning moves - and that let you sleep at night knowing you're covered as much as possible for what's ahead.
Putting a home in the name of a spouse to balance out a couple's assets and stay within estate-tax thresholds can make sense for tax planning, for example, but there could be a give-up in terms of protection from creditors, Giddens says.
"Asset protection isn't one thing. It's legal, financial, tax, and insurance planning," says Devji. "It all has to be coordinated or you haven't achieved anything. You can be making a half million dollars, but if you take big hits on your investments, then another big loss on a house, can you really afford to take the hit of a lawsuit? With our current economic reality, you have to make sure there are defenses."
That argues for developing a team of advisers who work with each other to make sure their plans mesh. It can also be a good way to implement some checks on advisers to make sure you're getting the best advice.
"In the end you can have a great legal plan but end up losing because you're working with a bad investment guy, or you've got a good liability plan but you lose because of an estate tax exposure," Devji says.
It's a lot to manage, to be sure, but the alternative could be some sleepless nights.
Janet Kidd Stewart is a freelance writer based in Marshfield, Wis. She holds a bachelor's degree and master's degree from the Medill School of Journalism at Northwestern University. She can be reached at email@example.com.
This article originally appeared online in the May 2012 issue of Physicians Practice.