Your Money: Wealth Protection 101

February 1, 2009
Janet Kidd Stewart

You may not feel wealthy, but a six-figure income makes you vulnerable to threats. Here’s how to protect yourself.


If a six-figure income isn’t making you feel rich or particularly secure, perhaps it’s time to think about asset protection beyond malpractice insurance.

Positioning your personal wealth to minimize both taxes and liability concerns is especially important now, as tax rates for higher-income individuals appear to be headed higher, or at least no lower, and lawsuits show no signs of abating.

Having already settled a malpractice lawsuit out of court in 2005, pediatrician Faith Myers today informally counsels the residents she trains in Lemont, Ill., to think about wealth protection.

“I want them to realize how vulnerable they are,” says Myers, who moved all of her financial assets into her husband’s name after the lawsuit, even though her personal wealth had not been threatened. “I tell them they have to be careful about protecting assets.”

Unfortunately, wealth protection can be a minefield. And physicians, with their high incomes and equally high vulnerability to lawsuits, can be the biggest targets in the field for purveyors of protection strategies.

That dilemma helped lead Howard Yeon to dual training in both medicine and law at Harvard University. Coming from a family of physicians - and married to a dermatologist - the spine surgeon has written journal articles and spoken at conferences on asset protection issues for physicians.

“Basically my whole family is made up of doctors,” Yeon says. “I’ve seen how flawed the insurance system is, with doctors incentivized to buy a lot of insurance.”

An advocate for malpractice insurance reform, Yeon believes other personal liability protections can be far more effective.

But before you begin dreaming of floating islands and equity stripping - two highly complex asset protection techniques typically reserved for the ultra-wealthy - start building your plan with a simple list of the threats, experts advise.

Taxes, divorce, and the people you come in contact with outside the office everyday can pose equal or greater threats to your wealth than what happens inside the practice.

Taxes

Simple strategies like maximizing the use of college savings plans and pretax retirement accounts, and placing investments in appropriate accounts based on the way they are taxed, can go a long way toward cutting your tax bite.

The rules vary on states’ 529 college plans, but many offer deductions on in-state contributions and all offer tax-deferred growth. The bonus: Like retirement accounts, they also offer protection from creditors.

You can minimize investment taxes by stashing active mutual funds with high annual turnover costs inside retirement accounts, but don’t forget to diversify your overall tax stream as well. Retiring with the bulk of your estate in accounts that will generate income taxes as you withdraw funds will hinder your ability to control taxes in the future.

Assuming your income is too high to allow contributions to a Roth IRA (an individual retirement account that is funded with after-tax dollars but grows and is withdrawn tax-free in retirement), consider diverting a portion of your workplace retirement contributions to a Roth 401(k) if you have that option.

Otherwise, make use of nondeductible IRA contributions and then plan to convert the accounts to Roth IRAs in 2010, when the income cap on conversions is scheduled to lift.

Other threats

Strategies for protecting yourself against personal threats are less straightforward. Marriages can end through death or divorce at any time, so simply transferring assets to a spouse doesn’t complete the asset-protection process, experts say.

Both Yeon and New York attorney Martin Shenkman suggest going through your household net worth statement to protect each line item.

“There are a lot of misconceptions about asset protection because people are usually looking for one magic bullet, like an offshore trust. The right answer is not one technique, but a lot of little steps,” says Shenkman.

For each asset and debt on your personal balance sheet, think about how it could create a liability on its own, or how it could be vulnerable as an asset that potentially could be seized.

Home safe home

Your home is a good place to start. Maintaining it properly and not allowing dangerous behavior to occur are easy and cheap ways to keep the lawsuit wolves from the door.

Financial advisers say clients in higher-risk professions often forget to consider their nonwork lives when it comes to minimizing risks. One adviser recalls a physician who transitioned from a large group to a solo practice where he would be on his own for malpractice and other protection. In the same week, he bought a trampoline for his kids and their neighborhood friends.

“Don’t leave hoses on the lawn and make sure there are fire extinguishers,” Shenkman says. “A lot of this comes down to just a little common sense.”

To protect the house from judgments, review your umbrella insurance policy, the attorney says. For relatively little cost - a few hundred dollars, typically - you can boost those policies to $5 million. At a minimum, the amount of your coverage should equal your net worth.

Also check your state’s statutes on homestead exemptions, as they aren’t always automatic and require a filing before protection is granted.

Wealthier physicians may also want to consider a qualified personal residence trust (or, QPRT, pronounced kew-pert). They protect your home from creditors, but you eventually pass the ownership of the home out of your possession, which for many physicians isn’t a tradeoff worth making, Shenkman says.

Investments

For financial assets not protected in college savings plans and retirement accounts, consider vehicles such as trusts, limited liability companies and family limited partnerships.

The key here is layering in these tools over time as your family situation and asset levels change. Talk with an experienced attorney about separating assets among several different LLCs, FLPs, and trusts over time, Shenkman says.

“Remember to create some flexibility as you go,” says Kristine Merta, an attorney and principal with Lowry Hill, a Minneapolis-based asset management firm for wealthy clients. “If you’re 45 and working, you may not get back to this document for some time.”

By creating custom beneficiary designations and flexible trust documents that allow your heirs to disclaim assets, for example, you can be ready for changes ahead, she says. The layering approach is also a wealth-protection tool in itself, Shenkman says, because it demonstrates a pattern of thoughtful legal steps over time rather than a harried attempt to hide assets.

“You can revisit your plan over time, but you want the basic strategy to be old and cold long before a lawsuit happens,” he says. “Don’t wait for the certified letter to arrive, because by then it’s too late.”

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 and master’s degree from the Medill School of Journalism at Northwestern University.

This article originally appeared in the February 2009 issue of Physicians Practice.