Developing a comprehensive strategy to decrease or transfer risk should be part of every physician's financial plan.
Physicians frequently indicate that a major financial concern is loss of assets as a result of litigation. The most devastating threat is often seen to be from medical liability. Claims of medical negligence are certainly a very real threat, particularly for physicians in high-risk specialties. But perhaps loss of personal assets is more of a perceived threat than a real threat.
In Missouri in 2010, 1,760 medical liability claims were closed: 510 with payment; 142 of which involved physicians and surgeons. Of those, 96.9 percent resulted in payment below the mandated minimum coverage of $500,000. Nine cases resulted in payment of more than $1 million.
A solution to this potential threat chosen by some physicians has been to title all valuable assets in the name of their spouse or (in states with joint tenancy by the entirety) in joint name. While this might provide creditor protection in some jurisdictions, such transfers can have unintended consequences. For example, ill-timed transfers done for the purpose of avoiding creditors can be subject to fraudulent transfer statutes. Having all assets in joint name or in the name of the spouse may fail to take advantage of the ability to transfer wealth (currently $5.12 million) free of estate tax at death. Statutes in some states allow estate planning techniques that afford significant asset protection while maintaining access to the assets. For the truly paranoid, more restrictive forms of asset ownership might also be available. For these and other reasons, protection of personal assets from medical liability must be balanced against the inefficiencies created by such a strategy, and expert legal advice is essential.
Because of high visibility and the public’s perception of their level of wealth, physicians are susceptible to a number of other, probably more immediate, threats. The more obvious threats are from creditors, claimants for personal injury or property damage, marriage dissolution, and business-related liability issues, including claims of sexual harassment, improper employment practices or fiduciary negligence. In some cases, significant liability can be mitigated by purchasing appropriate insurance or contracting with others to act on your behalf. Carefully review your personal and business policies on a regular basis to be certain the extent and limits are appropriate. Investigate techniques to add levels of protection, such as by separating your practice through the use of a corporate entity as opposed to a sole proprietorship. Medical practices that have invested in expensive equipment or real estate might also consider placing those assets in a separate corporate entity. This can also be a useful strategy for personally owned rental or investment property. Obviously, such arrangements require meticulous implementation and appropriate legal advice.
Loss of income due to injury or illness may be the biggest threat facing physicians throughout their careers. Here again, adequate health and disability insurance is the cornerstone. Life insurance should be adequate to repay debt, provide for the care of small children, and fund their education in the event of an untimely death of the primary earner or the stay-at-home spouse. Explore new options for funding escalating healthcare costs. For example, a high deductible health insurance policy can be linked to a Health Savings Account, reducing premiums and also creating tax-free saving designated for future health expenses. Health Reimbursement Accounts and cafeteria plans may be useful options within existing corporate-sponsored health coverage. Disability insurance to replace lost income during times of illness should be a feature of a physician’s asset protection strategy during peak earning years. Coverage amounts should be reviewed annually.
Often overlooked are the threats to wealth from inefficient investment management, poor tax planning, and incomplete estate plans. Keep in mind that one factor investors can control is the cost of investing. Look for investments that are inexpensive and tax efficient to own, and easy to liquidate. Use a strategy that creates pools of tax-deferred, tax-exempt, and tax-efficient investments. Each of these pools has unique characteristics and has a place in the overall portfolio, particularly as retirement approaches, when the timing and source of distributions is important. Consider multiple options when designing a retirement plan for your practice. While pensions are disappearing, your practice might consider such options as profit sharing, 401(k), Roth, or cash balance plans, structured to maximize contributions for the high earners while controlling overall costs. Review estate documents regularly to ensure that they take advantage of the frequent changes in regulations.
Addressing these and other threats should be a part of every physician’s financial planning process. The goal of that process is to produce an individualized model for achieving, maintaining, and transitioning wealth. This model, which must be flexible and dynamic, should be developed, implemented, and monitored with the help of a team of professionals working for your best interests.