Could the 529 be the holy grail of asset protection?

July 14, 2020

The basics of a diversified asset protection plan.

These days, physicians face increased risk from lawsuits, judgements, creditors, and malpractice claims, yet one of the most common mistakes they make is relying solely on their insurance policies to protect them in these high-stakes situations. Not only do they overestimate just how far their personal and professional coverage will go but they also generally have no backup plan to pick up where their policies leave off.

So, how do you protect your income and estate from legal claims? By integrating a number of diversified asset protection strategies into your overall financial plan.

What is Asset Protection?

When we talk about asset protection, we talk about re-locating funds in such a way that they are removed them from the property of the physician or the physician’s estate. After all, that is where the risk lies. Generally, any asset in the physician’s control, or the property of the estate, is vulnerable to legal judgement.

While there are a variety of strategies that can be implemented to shield your estate from costly judgements, the 529 Savings Plan might just be the holy grail and one you probably have not considered.

But First, The Basics

Here are the basic tenets of the 529 Savings Plans:

  • A 529 is a tax-advantaged savings plan that is exempt from federal taxes and was designed as a way for families to save for college expenses on behalf of a beneficiary.
  • Any US citizen or resident alien over 18 years of age can open a 529 for the benefit of themselves, children, grandchildren, or any other relative or friend.
  • Monies must be used for qualified education expenses in order to be withdrawn tax-free.
  • Only one person can own each plan and there can only be one named beneficiary per plan.
  • There are no income restrictions associated with contributions, so they are a viable option for high-income earners like physicians.
  • Contributions can be made up to the annual gifting limit (currently $15,000) but five years of gifts can actually be made at one time into a 529 plan (currently $75,000). If the five-year strategy is used, additional gifts cannot be made into the plan for the ensuing five-year period without gift tax consequences.

The Asset Protection Benefit

Because the law sees funds contributed to a 529 as gifts made on behalf of the beneficiary, funds kept in these accounts are not considered part of the physician’s estate and are safeguarded from lawsuits and creditors… for the most part.

Since 529s are not federally regulated, but state regulated, each state can set its own legal mandates for their state-sponsored plan. Some states have built in protections from creditors, while others only offer these protections if the accounts are in the child’s name (not the parent’s). For example, the state of New York will protect all assets in a 529 if the account is owned by the child, but only $10,000 if it is owned by someone else, say a parent or grandparent.

Nineteen states have given their savings plans protection from outside suits and creditors no matter who is named as the accountholder. As a physician looking to use the 529 as a sheltering tool, you’ll want to choose a plan that offers these full protections or consider putting the account in a spouse’s name to ensure the funds are seen as independent of your estate.

So, overall, a 529 plan can:

  • Provide tax-free income and growth for educational expenses
  • Shelter a significant amount of funds from potential outside threat by removing it from the physician’s estate

Not only do these plans benefit the accountholder from the tax planning, estate planning, and asset protection standpoints, but will benefit the beneficiary down the road when the assets are needed, as well.

Of course, asset protection measures on their own are no replacement for insurance, and vice versa, which is why a strategic integration of both will likely be a physician’s best bet when it comes to shielding their estate from potential lawsuits.

About the Author

Julianne F. Andrews, MBA, CFP, AIF is a principal and co-founder of Atlanta Financial Associates. She specializes in working with physicians and executives in the healthcare industry. Her passion for working with physicians comes from being a pediatrician’s spouse for more than three decades. Julie has been featured on Forbes’ list of America’s Top Women Wealth Advisors since 2017 as well as Forbes’ Best-in-State Wealth Advisors since 2018. Julie can be reached at jandrews@atlantafinancial.com.