Asset Protection Strategies for Doctors: Protecting Your Family’s Assets from Malpractice Claims
If you are a dentist or doctor, you may be concerned about protecting your family’s assets from the threat of large malpractice claims. This concern is not unfounded; odds are that you will face a medical malpractice lawsuit at some point. In certain specialties, such as neurosurgery, the risk of a malpractice claim approaches 100% over the life of one’s career.
Most disturbing to many physicians is that claimants in a malpractice lawsuit can reach their personal assets, wiping out the things they’ve worked so hard to provide for themselves and their families.
There are a number of ways to reduce your family’s financial exposure to lawsuits against you. Below are some basic rules for protecting assets from malpractice claimants and other creditors:
- Maximize investments in assets that are protected from creditors by statute
The first and easiest rule is to maximize your investments in assets that are protected from creditors by statute. Certain types of assets, such as pension plans, retirement accounts, and 529 college savings accounts set up for your children generally cannot be reached by creditors in bankruptcy or other litigation proceedings. If you are at high risk of a lawsuit, max out your contributions to these accounts. These kinds of contributions have the added advantage of reducing your family’s income tax liability.
- Limit the assets that are owned by you directly
Second, limit the assets that you own directly. Creditors cannot reach assets that are not owned by you, so, to the extent practicable, avoid direct ownership of high-value assets. The most common strategy for avoiding ownership is through trusts.
If you expect to receive an inheritance from your parents, ask them to instead leave it to a trust for your benefit so that the inherited assets are never held by you directly. This is one of the easiest and most effective ways to protect assets.
You can also transfer assets to a trust for the benefit of your children or spouse. Assets in the trust are not legally yours and therefore cannot be reached by creditors. The flip side of this, however, is that you generally cannot access these assets for your own use at a later date if necessary.
You may also wish to transfer assets to a self-settled trust under the jurisdiction of certain asset-protection friendly states. In most states, you cannot shield assets from creditors by transferring them to a trust of which you are a beneficiary. However, certain states, including Delaware, Alaska, Nevada, and South Dakota allow this strategy. While residents of these states can utilize this technique with confidence, it is not yet clear if it is effective for those who reside in other states.
- Structure your assets so that they are unattractive to creditors.
The third rule for protecting your wealth is to structure your assets in such a way that they are unattractive to potential creditors. By holding your assets in a business entity that is owned by more than one person, you can set terms for transferring ownership interests in the business that make it unattractive for a creditor to own. You can think of this as a poison pill. As soon as a creditor takes ownership of your interest in the business entity, the interest becomes less valuable. For example, you can place assets into a family limited partnership owned by multiple family members, with a partnership agreement that requires approval of the other family members in order for an outside owner to have any voting rights. This type of planning can be effective in discouraging creditors from pursuing those assets.
- Put a plan in place BEFORE any claims have been made against you.
The fourth, and possibly most important, rule for asset protection planning is to take action early, BEFORE any potential claims arise. Once you’re aware that a patient has experienced a poor outcome that may result in a lawsuit, it’s too late to put many of these strategies into place. Transferring assets after you’re aware that a claim may be made against you is not effective, and, in fact, may be unlawful.
If you’re in a high-risk profession and want to protect your assets from creditors, consult an estate planning attorney to begin planning as soon as possible.