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How extended families present asset protection risk


Three predictable and recurring legal and financial risks physicians face when holding informal jointly-owned with extended family.

family butterflies watercolor

Editor’s Note: This is the first part of a two-part series on asset protection in the context of family owned businesses and assets.

Asset protection issues for physicians aren’t contained by the walls of your practice. Today we examine a recurring risk I regularly deal with and answer questions on from doctors; the effect of extended families and old-world cultural norms on asset protection plans.

Lost In Translation — When Old World Values Create Current Legal Risks

An issue I have dealt with for many years, including at least three times in the last two months alone, is the tendency for some physicians to hold jointly owned assets informally with other family members in some kind of “constructive trust”. While far from a scientific study, nearly two decades of practice in this area of law with a diverse national client base has clearly shown me that physicians from cultures that emphasize extended families (most commonly, Asian, South Asian, Middle Eastern, LatinX and Eastern European) and sharing of assets and labor tend to engage in investing as a familymore often and with less formality (if any) than they should. These arrangements fall into several predictable fact patterns, including the following.

“I don’t own anything, my brother owns it”.

In some cases this is done as a poorly-conceived asset protection strategy, where the family assumes that keeping assets in the name of another family member who is not a physician keeps them safer from the physician family member’s professional liability. 

“I own an apartment building and two rentals, in my brother’s name”.

Another common scenario is that the (often higher earning and more creditworthy) physician family member simply funds the businesses and real estate investments of other family members, including assuming onerous debt obligations, simply because they are able to do so, with an informal understanding that the doctor is a silent partner with an equity interest and/or who is owed some capital or profit share back at a future date.

“I own part of several businesses and real estate investments, with my family member”.

In other cases the physician themselves holds the assets in their own name and one or more family members have operational control and contribute labor. There is often a division of profits that the non-owner family member relies upon as a primary income source to support their own family and they have no formal claim or title to the business. This may be done for a variety of reasons including differences in the creditworthiness, financial sophistication and the existing creditors and financial difficulties of the other family member.

So What’s Problem?

All of these strategies present predictable and recurring legal and financial risks; here are the biggest ones.

1. Personal Liability. Regardless of who holds title, any property held personally by an individual is subject to all that person’s personal and professional liabilities including lawsuits, divorces, and bankruptcies. While holding the asset in a legal entity like an LLC may help protect it from some unrelated external liabilities, if the person in harm’s way is the sole owner of that entity, the income distributions that come out (including your share) are still fully exposed to their liability. The person holding the asset cannot assert.“ I only own this on paper for my sister the doctor and she really owns all or most of it,” as a defense.

2. Relationships and People Change. Doing business on a handshake, if executed by a lawyer, is called “malpractice”. Don’t be a victim of your own poor planning or risk assets you and your family have a right to based on the hope that the person you are trusting won’t ever be estranged, dishonest, develop a substance abuse issues or simply decide that they are “owed” some or all of the business for the work they put in. Regardless of your informal understanding the, owner of a business or other asset is who the paperwork says it is. Having to unravel a business, trace capital contributions and prove and agreement on terms of some sort of verbal contract is expensive, time consuming and comes down to a legally un-predictable “liars contest”.

3. Estate Planning. In many cases the person holding the asset may not have an estate plan in place or their estate plan may not specify that you are an owner or are holding a debt obligation related to the business. This means that the $200K you lent your sister-in law to open her business goes to her family, along with the business and the rest of her assets.

About the Author

Ike Devji, JD, has practiced law exclusively in the areas of asset protection, risk management and wealth preservation for the last 16 years. He helps protect a national client base with more than $5 billion in personal assets, including several thousand physicians. He is a contributing author to multiple books for physicians and a frequent medical conference speaker and CME presenter. Learn more at www.ProAssetProtection.com.

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