Physicians have long been worried about protecting themselves from malpractice claims. But, now the uncertainty of healthcare reform promises to muddy the financial waters. What to do?
After finally managing to pay off education debt and save a little money, are you getting the feeling your wallet is becoming a big red target?
Malpractice and creditor claims have long threatened doctors' financial health and occupied many of their hours with worry and planning, even though divorce and poor investment decisions can actually be much more common and equally financially devastating.
Now, enter the newer unknowns about the impact of health reform on future income and the threat of rising taxes as the nation works its way out of the recession.
"Nobody knows even the near-term future anymore," says Peter Hallarman, a dermatologist in Northbrook, Ill. "You get a sense that they change the rules every year now."
Hallarman isn't alone in his thinking. Financial pros say physicians, like a lot of investment clients these days, are almost in paralysis mode as political winds blow.
"The landscape for physicians has changed considerably," says Steve Roberts, president of CCP, Inc., a fee-only planning firm in Palatine, Ill., that has several physician clients. "There's just more uncertainty around health reform, with some physicians deciding they just don't want to deal with it so they decide to retire early."
That in itself has financial implications, of course, but doctors can't mitigate every risk. Still, there are some basic moves that can be made now to cover your bases against a variety of threats, experts say.
Lawsuits and creditors
Statistics on malpractice lawsuits show a heavy concentration of actions in the fields of OB/GYN and surgery and a recent American Medical Association survey of 5,825 physicians showed that 90 percent of surgeons have been sued by age 55.
Across the board, however, malpractice suits have actually been declining thanks to limits in a growing number of states on non-economic damages that can be awarded, says Alan Williams, a law professor at Florida Coastal School of Law and author of "Physician, Protect Thyself," a book on avoiding malpractice suits.
How should you think about liability risk going forward? Now's the time to consult your insurance agent and ask for a coverage review to see if you're possibly over-insured, says Williams. Not sure what to look for? Consider having an attorney look over the review's recommendations.
A typical policy might cover $1 million per incident and up to $3 million per year, and that's adequate for most physicians (other than obstetricians and surgeons), Williams says. And be sure you understand the differences, including costs, between occurrence-based and claims-made policies.
Another tip: Remember you'll need tail coverage along with a claims-made policy to cover yourself after the term ends, so factor in those costs when comparing plans.
Don't stop there, however. Beyond liability insurance, consider these ways to protect your assets from lawsuits:
Umbrellas. Revving up your umbrella personal liability coverage is an excellent, and relatively cheap, way to add protection from creditors, says Roberts. Make sure this coverage is at least a low multiple of current net worth, he says.
Qualified plans. Maximizing the amount of income you stuff into retirement plans is another relatively inexpensive way to park income that is protected from potential creditors. In general, federal laws enacted in 2005 make it easier to protect workplace retirement plan rollovers into IRAs.
There are caveats, however, including the fact that those rollovers are exempt from creditors in a federal bankruptcy situation, but not necessarily from other court actions, so check your current state law on those types of cases.
And while traditional IRAs, Roth IRAs, and certain portions of SEP-IRAs won some new protections under the law, their lawsuit immunity is typically capped at $1 million.
Mid-career physicians should also consider executing a post-nuptial agreement with their spouses, says Carl Palatnik, a Melville, N.Y., financial adviser with specialized training in divorce planning issues.
"A good post-nup will protect both parties and it's a good form of risk management, particularly in a blended-family situation," says Palatnik.
Even couples contemplating a split should think about a post-nup, he says, because they can be hammered out directly by the spouses while the relationship is still relatively cooperative, which can save time and money down the road if there's an eventual split.
Taxes and investments
Managing taxes is another form of asset protection that shouldn't be overlooked, says Kristine Merta, a principal and tax expert with Lowry Hill, a Minneapolis-based wealth management firm.
Maximizing the annual $13,000 gift-tax exclusion is an ultra-low cost way to transfer wealth from your estate to heirs during your lifetime, she says. The exclusion limit caps the total amount you can give to an individual without triggering certain estate-tax obligations.
Likewise, converting traditional IRAs to Roth IRAs can save substantial amounts of future taxes, provided you have the time horizon to recoup the money you'll spend today in paying taxes at your highest bracket on the converted funds, says Roberts.
Hallarman, 54, decided to take the plunge and make a conversion last year on the advice of his financial adviser, Sue Stevens, a wealth manager in Deerfield, Ill.
"We had a lot of discussions about it first, but I think there's enough time between now and the time I'll use that money that this will pay off," he says.
"It means more tax now, but no tax on those assets for the rest of your life, or your children's lifetimes," says Stevens. "Roth IRAs don't require minimum distributions, either, so you have more control over when you use that money."
And if you support charities, consider a charitable lead trust, says Merta, where you get a lump sum out of your estate and a charity gets an income stream from it for a certain period of time, after which the money goes to your heirs.
Finally, don't forget to manage the location of your investments, not just the allocation you have to diversified asset classes, experts say.
Not sure where your high dividend-paying stocks belong because of the volatility in their tax treatment? Consider them for your newly converted Roth IRA. Dividends have proved to be an overlooked growth engine for portfolios, meaning they could actually be among your nest egg's better performers and you won't have to worry about the tax man.
Janet Kidd Stewart is a freelance writer based in Marshfield, Wis. As a contributing columnist for the Chicago Tribune, she writes a weekly, syndicated retirement column called "The Journey" that appears in Tribune newspapers across the United States. She holds a bachelor's degree and master's degree from the Medill School of Journalism at Northwestern University. She can be reached via firstname.lastname@example.org.
This article originally appeared in the January 2011 issue of Physicians Practice.