Fatal Flaws in Physicians’ Asset Protection Planning – Part II

January 18, 2011

Here are some additional issues to keep in mind when addressing the crucial issue of asset protection.

Read Part I of this article, published last week, here.

5. SQUARE PEG, ROUND HOLE - USING THE WRONG TOOL - Certain vehicles have great use for specific business functions supported by statute, tax law, and case history. You and your planner must have a good handle on these issues and know what pros and cons each entity presents, what the effect on your liquidity will be, and what it will take to maintain and support that stated business purpose as a start (Starting to see the detail required?). One good example is the common misuse of Family Limited Partnerships (FLP) to own the client’s personal residence. What is the legitimate business purpose of using a vehicle that is most often created for “family investment management and wealth transfer” to own the house you personally live in? If you’re not paying commercially reasonable rent, you don’t have one. The plaintiffs (or worse, the IRS) will successfully argue that you are using the FLP as personal piggy bank that is not legally distinct and immune from your personal assets and liabilities.

6. DRAGGING LIABILITY INTO YOUR PLAN - Similarly, we often see dangerous articles of personal property like your personal vehicles moved into this structure or others like an LLC or S-Corp. that is your primary business, or equally dangerous, into an entity like an FLP that is holding safe and attractive assets like cash, stocks, bonds, and other liquid assets. Think about it, if you lease or own your vehicle through your business, you have linked the most dangerous thing you likely do on a daily basis, drive a car, and linked it to either the source of your wealth, your business, or in the case of your FLP, the place you keep your wealth.

7. RELYING ON GIFTING TO RELATIVES (SEE ALSO FAILING TO ACT) - Transferring all of your assets to your spouse and/or children, especially after something has happened, will not protect your assets from a lawsuit and simply opens up another Pandora’s Box. There are thousands of lawsuits filed daily due to employment grievances, “slip and fall,” and auto accidents. Consider this scenario: Let’s suppose that you transfer all of your assets to your 18-year-old son who causes an auto accident. Several other cars are involved in the accident and several injuries are incurred. Chances are high that the other parties will come looking for the driver with the deepest pockets. If your son “owns” your house and business, a sympathetic jury will undoubtedly take the possession away from your son in order to teach him a lesson for his reckless driving. The same holds true for spouses, parents, and even friends. Also, gifting is limited to about $13,500 annually, per spouse, per donee. Gifts over that amount must be documented with a gift tax return. Failing to do so will result in you having to answer the question: “Are you lying now re: the date and validity of this transfer or did you cheat the IRS?” This is a bad place to be in a time of need.

8. USING UNPROVEN, POORLY STRUCTURED TOOLS OR SCAMS LIKE “FRIENDLY LIENS” - Another common scam I see is promoters of LLC mills setting up LLCs that you or a friendly party own and then having that entity record a “lien” against some valuable asset, typically real estate. While validly recorded and executed liens do have great deterrent power against creditors, they have to be backed by a real exchange of value. So if your brother-in-law owns a Nevada LLC that holds a lien on your home for most of its value, there should have been some exchange or “consideration” roughly equal to the amount of the lien. “Your sister has a $300,000 lien against the $400,000 home you live in? Uh, OK…then where’s the record of the $300,000 she gave you, as a bank would have in a real home equity loan? She didn’t give you anything in return? Great, we’ll take the house.”

This article just scratches the surface of what you need to consider when evaluating your exposures, asset protection planning, and the countless options available. Act today, seek experienced counsel, and keep looking for more light and information that will help you and your family keep and enjoy the fruits of your labors. Remember, it’s not just what you make; it’s also what you keep!