Protecting what you’ve built

You’ve worked hard for your money—both current and future. What steps should you take to protect it?

By James M. Dahle, M.D., FACEP, WhiteCoatInvestor.com | Feature Articles | Winter 2017

 

Many physicians carry a profound fear of losing their personal assets due to a mistake at work. By understanding just how rarely this actually occurs, you can alleviate these fears—and make reasonable decisions about which steps to take to protect your assets. According to the National Practitioner Data Bank and health care cost writer David Belk, M.D., the number of paid claims against physicians between 2003 and 2014 dropped from 15,000 per year to 9,000 per year, with only about 2,000 of those paying out more than $500,000.

Plus, almost half of those claims occurred in just six states: New York, Pennsylvania, New Jersey, Massachusetts, Maryland and Illinois. In fact, the amount of money paid out per capita in New York is 2,969 percent higher than that of North Dakota and 39 percent higher than that of any other state.

According to a 2012 study published in the Archives of Internal Medicine, only about 55 percent of claims go on to become lawsuits, and the vast majority of those are resolved before going to trial, which means that less than 5 percent of claims end up going to trial. Of those that went to trial, 80 percent of them are decided in favor of the doctor. Of those that were not decided in favor of the doctor (about 1 percent of claims), the vast majority of awards from the jury are within the limits of the policy. Most of those that are above policy limits are then reduced to be within policy limits during the appeals process.

All that to say, the likelihood of your having to pay from your personal assets in any given year is less than one in 100,000, despite the astronomical awards often widely publicized. For example, in 2009’s Hugh v. Ofodile, a jury in New York famously awarded a plaintiff a $60 million verdict for pain and suffering following a thigh lift surgery. After two years of appeals, the verdict was reduced to $600,000, which was well within policy limits.

Tried and true techniques

Given the extremely low likelihood of having to pay out of personal assets, you needn’t lose any sleep over this issue. Rather, it is reasonable to limit the time, money and effort you spend protecting against this extraordinarily unlikely outcome. You should also consider the ethical dilemma involved in any asset protection plan—that if the plaintiff was legitimately damaged through your negligence, you have a legal and ethical duty to make it right financially, even if it involves the loss of your personal assets. Many would consider it unethical to engage in a scheme to prevent a plaintiff from collecting what is rightfully his.

Your first reasonable line of defense against any liability claim is an adequate insurance policy. Liability insurance policies not only pay any judgment that may come due, but just as importantly, pay for the cost of the defense, no matter how many years it may take.

Physicians tend to worry most about malpractice liability, which is defended using a professional liability policy, but they should also worry about their personal liability, which is defended using a homeowners, renters or auto liability policy. In addition, the wise physician adds an “umbrella” policy on top of these policies to provide liability coverage of $1–5 million. The good news about umbrella policies is that you can buy a great deal of insurance for a very low price. Several million dollars of coverage is typically available for less than $500 a year—dramatically less than a malpractice policy.

A malpractice policy needs to be both adequately sized and maintained for an adequate length of time. The general guideline for deciding how much coverage to carry is to match what’s typical for your state and specialty. For example, emergency physicians in Utah typically carry a policy with limits of $1 million per occurrence and $3 million per year.

Eric Tait, M.D.

In addition to proper insurance coverage, Eric Tait, M.D., recommends identifying an asset protection plan. · Photo by Kelli Durham

Eric Tait, M.D., an internist with Central Houston Medical Group in Texas, notes that his employer provides coverage of $200,000 per occurrence and $600,000 per year, so that is what he carries. Carrying less coverage could expose you to additional risk of paying out of pocket. More coverage, on the other hand, may make you more of a target due to “deep pockets.”

For insurance coverage to be adequate, it must remain in force until the statute of limitations runs out, which is typically two years from discovery of the error in question or two years from the time the plaintiff turn 18. You can get this length of coverage by purchasing either a “tail” policy in addition to your “claims-made” policy or by purchasing an “occurrence” policy (which includes tail coverage) from the get-go. When signing an employment contract, be sure it is very clear how your tail will be covered, because the cost of a tail is often two to three times the annual premium for a claims-made policy. Ideally, your employer will cover that cost under any circumstances, but this varies greatly among employers.

Sanghamitra Sadhu, M.D., a nephrologist with Renal Care Orlando in Florida, carries a claims-made policy. “If I change jobs, I hope to negotiate it as a sign-on bonus or part of my compensation package at the new job.”

Tait doesn’t advise relying solely on insurance. “For me it is equally important to have an asset protection plan in place as it is to have malpractice insurance,” says Tait.

Though this can greatly benefit you in the case of a lawsuit, it is important to realize there are no guarantees with asset protection. An attorney or insurance agent promising an iron-clad technique is usually overselling his favored technique. Any asset protection technique is designed to make it harder and more expensive both to find out what you own and to actually get it. The idea is to make it take more time, effort and money to get to your assets.

In addition, asset protection laws are always state-specific. What works in one state may not work in another. Not only do the likelihood of being sued, the likelihood of losing a trial and the expected payout vary by state, but so do the assets that creditors protect. The ultimate protection against your creditors is to declare bankruptcy. Then you keep whatever your state protects, and you lose what it does not. In practice, however, it is more typical for a defendant to settle for some amount rather than to go through bankruptcy. For example, a physician may have a lien placed on his home as a result of the judgment and may simply take out a second mortgage to pay off the lien.

Many states have a “homestead” law that protects a certain amount of your home equity from your creditors. The value protected varies dramatically, however. Florida, for example, protects property of unlimited value (up to 160 acres in rural areas and half an acre in urban areas), but Alabama protects only $5,000 of home equity ($10,000 if you’re married). Obviously, from an asset protection standpoint, it is better for a Florida physician to have his wealth in his home than it is for an Alabama doctor. Practically speaking, that might mean a Florida physician would buy a slightly larger house and pay off the mortgage faster. Sadhu, the nephrologist in Florida, admits buying a little more house than she otherwise would have due to this homestead law. “We have been hitting our mortgage aggressively with extra payments every year once we have met our retirement savings goal for the year. [The homestead law] did influence our decision with regard to how much house we bought. We decided we would buy the kind of house we dreamed of and save in other areas of our lives.”

John Odette, M.D.,

The homestead law in Texas, where John Odette, M.D., is an ophthalmologist, protects up to $1 million and mentions some very specific assets, such as two firearms and up to 120 chickens. · Photo by The Bird & The Bear

The homestead law in Texas is also interesting. Not only is up to $1 million protected, but $30,000–60,000-worth of very specific personal assets are also protected, including two firearms and up to 120 chickens. John Odette, M.D., an ophthalmologist at Austin Eye in Austin, doesn’t own 120 chickens but does say that he “plans to buy a little more house than I otherwise would as asset protection, although not too much more.”

Aside from a homestead in a few specific states, the best asset protection technique for most doctors is simply to maximize contributions to retirement accounts. In most states, 100 percent of your 401(k) and IRA balances are protected from creditors in bankruptcy. In some states, plans compliant with the Employee Retirement Income Security Act (ERISA), such as 401(k)s, receive more protection than IRAs. In other states, only an amount “reasonably necessary for support” is protected, so be sure to know the law in your state when fashioning an asset protection plan.

Some states also provide protection for the cash balance of insurance products like whole life insurance and annuities. Insurance fees result in a heavy drag on returns in these products, but for a physician who highly values asset protection benefits and actually lives in a state where these benefits exist, it can make sense to place some money into them. Odette, for instance, has strongly considered purchasing a whole life insurance policy primarily for the asset protection.

Another important asset protection technique involves titling assets correctly. In many states a married couple can title their home as “tenants by the entirety,” which means that both people own the entire house, rather than each owning half. In effect, this means that a suit against just one of them cannot take the house. Sadhu and her husband use this technique. “My home state of Florida recognizes tenants by the entirety, so this is the best way to title our house from an asset-protection standpoint, since it protects our homestead from a claim against either my spouse or me. This is vital for us, being a two-physician couple.”

Tenancy by the entirety is a much better option than a technique some physicians use—putting everything in the spouse’s name. You are far more likely to lose your assets in a divorce than in a malpractice lawsuit. That hasn’t stopped Tait from titling his primary residence in his wife’s name and his secondary residence in his own. He notes, however, the main reason for that was not asset protection, but to increase the ability to obtain leverage for his secondary profession as a real estate investor. Tenancy by the entirety isn’t available in Texas anyway.

Techniques to go above and beyond

Once you get beyond these well-known protected assets and titling techniques, asset protection strategies start becoming significantly more complicated and more expensive. At this point, a physician desiring more asset protection ought to take a look at reducing the risk in his life. That might mean moving to a state with fewer malpractice claims and lower payouts. An OB-GYN might drop obstetrics, and a general surgeon might drop trauma coverage. It might mean getting rid of the family dog, the pool and the trampoline in the backyard. It could mean not inviting your child’s friends on your boat and not serving alcohol when entertaining. But at a certain point, most reasonable people agree that you cannot eliminate all risk from your life.

Some physicians wonder whether they can reduce their risk by incorporating their practice. Unfortunately, malpractice is always personal, so having a shell corporation doesn’t provide any protection from professional liability, although it could have some usefulness from business-related liability (such as if an employee sued you for breach of contract).

Limited liability companies also have some useful asset protection possibilities, although the amount of protection they provide varies highly by state. Limited liability companies or LLCs are used to segregate “toxic” assets, such as rental properties, from “safe” assets, such as a portfolio of mutual funds. The idea is that if someone gets hurt on your rental property, the most he can receive is the value of that LLC, which contains only that particular property. LLCs can also make it more difficult to figure out exactly what you own. This was important to Tait following an incident at one of his investment properties. “At one of our apartment complexes, we experienced a violent crime early on in our ownership. News cameras were everywhere. The news agencies tried to find out who owned the property, but because of our structures, they could never find out. We were not negligent in any way, but we surely did not want any unwanted public exposure.”

Another use of LLCs occurs in states where creditors are limited to a “charging order” to get what they are due. A charging order basically says that if the LLC distributes income, the creditor gets their cut of it. Whether or not an LLC actually distributes income, however, is under the control of its owners. To make things even more interesting, an LLC is usually a pass-through entity from a tax perspective. So it is possible not only not to distribute income from the LLC, but also to send the creditor the tax bill for that income! Needless to say, in some states, this technique can be quite the incentive for a creditor to settle for less.

One of the best asset protection techniques is simply to give your money away. That which does not belong to you cannot be taken from you. This might mean establishing a charitable trust, funding 529 plans and Uniform Gift to Minors Act (UGMA) accounts for your children or putting money into an irrevocable trust. Like any asset protection technique, this needs to be done long before you are ever sued lest it be viewed as a fraudulent transfer. In fact, any technique done solely for the asset protection benefit is likely to be undone by a judge. It is always better to have a reason related to your business purposes or your estate planning to implement an asset protection technique.

There are more exotic asset protection techniques like family limited partnerships and off-shore accounts that can be useful in certain circumstances. Some of these are scams, many are overpriced, and all are usually unnecessary given the rarity of being successfully sued for an amount above your policy limits. If you are interested in these sorts of techniques, you should consult with a reputable asset protection attorney in your state.

Investing and saving as asset protection

Truthfully, most docs spend too much time worrying about asset protection and not enough time worrying about far more common causes of not reaching their financial goals. One common reason doctors and many others do not reach their goals is the death or disability of the breadwinner. Both of these issues are easily insured against. A doctor may earn $5–10 million during her career. Thus, her earning power is her most valuable asset. Disability insurance is expensive, but critical in the years prior to financial independence. A good individual disability policy typically costs 2–6 percent of the amount of income protected. So a policy that pays a monthly benefit of $10,000 in the event of disability would likely cost a healthy doctor in her 30s a few hundred dollars per month.

Premature death is also a risk worth protecting against. Luckily, term life insurance is much cheaper than disability insurance, so it is relatively inexpensive to purchase a policy of $1–5 million to provide for loved ones in the event of death. A healthy 30-year-old doctor can buy life insurance for as little as $280 per year per million dollars of coverage. Both types of insurance are best purchased from an independent agent who can sell you a policy from any company.

Another common reason doctors don’t reach their financial goals is inadequate savings rates. A doctor who wishes to maintain his lifestyle in retirement should be aiming to save 15–20 percent of his gross salary for retirement throughout his career. It doesn’t matter what your asset protection plan is if there are no assets to protect!

Inflation, taxes and investment fees are an investor’s chief enemies. Inflation is best protected against by taking an adequate amount of risk with the portfolio. A portfolio invested 100 percent in CDs, savings accounts and bonds is unlikely to grow adequately once the effects of inflation are taken into account. Most doctors will need to take on at least some risk with their investments by including risky assets like stocks and real estate in their portfolios. Your tax burden can be lowered by investing inside of tax-protected accounts such as 401(k)s, Roth IRAs, and even health savings accounts and 529 college savings accounts. Finally, investment fees can be minimized by reducing the frequency of your transactions (which is likely to boost returns anyway), by making sure you’re paying a fair price for any needed financial advice, and by using low-cost investments such as index funds.

Physicians spend more than a decade developing the knowledge and skills necessary to earn their high salaries. They continue to work hard throughout their careers. No wonder they are interested in protecting their assets from potential creditors as well as the corrosive effects of inflation, taxes and investing fees. Smart spending decisions combined with an intelligent investing plan and a reasonable asset protection plan will help you reach your financial goals.

James M. Dahle, M.D., FACEP, is the author of The White Coat Investor: A Doctor’s Guide to Personal Finance and Investing and blogs at whitecoatinvestor.com. He is not a licensed financial adviser, accountant, or attorney and recommends you consult with your own advisers prior to acting on any information you read here.

 

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