Asset Protection Law Journal : Asset Protection Lawyer & Attorney : Kenneth J. Laino : Schneider Smeltz Ranney & LaFond Law Firm : Trusts, Estate Planning

Just in case you need another reminder to develop your own personal asset protection plan...

More than half the states have tried to place caps on jury awards in malpractice cases.  But the caps have been struck down by courts in several states.  On Monday, the Georgia Supreme Court (in a seven-zero decision) struck down a 2005 state law that capped jury awards at $350,000 for the pain and suffering of a malpractice victim.  The court ruled that the state could not impose such a limit on the jury.  Some states seem to be accepting limits and others are not.  There does not seem to be a clear national trend at this point in time.  You can read more about this recent court decision in either the New York Times or the Augusta Chronicle.

The Georgia Supreme Court decision is another reminder that physicians should not simply wait for state legislators or the courts to protect them from liability claims.  Malpractice insurance is of course essential, but you should not stop there.  There are laws that allow you to protect assets -- and you should take advantage of them to the greatest extent possible.  From simple steps like maximizing contributions to qualified retirement plans to more sophisticated planning with family limited liability companies, there are a variety of asset protection strategies worth considering.  But do not wait for state legislators, the courts or anyone else to help you.  Instead, focus on your own personal asset protection plan.

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Whether you are a physician in private practice or working for a hospital or other health care organization, you should consider some basic steps to protect your assets.  Here are a few suggestions:

1. Maximize contributions to IRA's and other qualified plans.  Assets in IRA's and qualified employee benefit plans are generally awarded special protection from creditors.  Many plans (including 401(k)'s) are also protected in bankruptcy because they are not considered part of a bankruptcy estate.  The Bankruptcy Abuse and Protection Act of 2005 limits the IRA exemption in bankruptcy to $1,000,000 adjusted for inflation.
2. Consider some life insurance strategies.  In many states death benefits from life insurance, as well as the cash value of a life insurance policy, are exempt in whole or in part from claims of creditors of the insured.  In Ohio, for example, under Ohio Revised Code Section 3911.10, insurance death proceeds are exempt by statute if paid to the spouse, children or certain other designated beneficiaries.
3. Consider various trust arrangements.  Not all trusts provide asset protection, but some do.  For example, irrevocable life insurance trusts (ILITs) can be a great estate planning tool and can also provide significant asset protection.  If the ILIT is formed properly creditors of both the person who set up the ILIT and the beneficiary should have no rights in either the cash value or the death benefits of the insurance. 
4. Split assets between spouses.  Simply dividing assets between spouses may offer some protection.  As I have explained in another post, holding property as joint tenants is generally not the best strategy from an asset protection standpoint.
5. Focus on your principal residence.  Some states (Florida and Texas in particular) provide special protection for your principal residence against claims of creditors.  Ohio, however, provides a so-called homestead exemption of only $20,200 pursuant to Ohio Revised Code Section 2329.66.  Strategies for protecting your home from creditor claims therefore vary from state to state.

Many of these considerations are applicable to anyone who has accumulated assets that are worth protecting.  Since physicians (especially those in certain specialties) are far more at risk than many other people, they generally have a greater need to focus on asset protection.

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A couple weeks ago I posted some general observations about asset protection planning for physicians.  While a doctor should be taking steps to protect his or her own personal assets, physicians in a private medical practice should be taking additional steps to protect the private practice itself.  Here are some items worth thinking about:

     1. Consider using multiple entities to reduce liability and possibly gain some tax benefits.

·       Use one entity for the medical practice itself.

·       Use a separate entity to hold real estate and then lease the real estate to the practice group.

·       Use another entity to hold and lease medical equipment to the practice group.

·       Depending on the size of the practice, a management holding company might be advisable in connection with the various entities.

·       Patents and any other intellectual property should also never be owned directly by the medical practice.

·       Separate entities should generally be limited liability companies because they generally provide the best asset protection and they provide flow-through tax treatment.

Formation of additional entities can obviously involve start up costs, as well as some additional costs for on-going operations. The size of a medical practice (both in terms of the number of physicians and in terms of revenue) will influence how many separate entities may be appropriate.

     2. Consider different alternatives with respect to your accounts receivable.  

·       Some private medical practices (and other health care organizations) use a separate billing company. 

·       It is sometimes advisable to pledge accounts receivable in connection with a bank loan, since a judgment creditor will be in a second (and less appealing) position to the bank.

     3.  Make sure that an agreement is in place among members of the medical group covering what happens if a physician dies, becomes disabled, retires, or otherwise leaves the practice. Despite all the concerns about malpractice liability, more physician groups experience problems in this area than with a malpractice claim that exceeds insurance limits.

All of the foregoing are of course just general observations. Each situation must be analyzed on its own. But in any event, a medical practice should periodically review its structure and operations from an asset protection standpoint.

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Physicians should have no hesitation whatsoever in protecting their assets to the greatest extent allowed by applicable laws.  Physicians have a greater need for asset protection planning than many other individuals simply because of the nature of their work.

If a professional baseball player consistently strikes out half of the time but gets a base hit the other half, he will likely end up in the Baseball Hall of Fame.  Doing well every other time at bat would be outstanding.  A professional basketball coach would be ecstatic if one of his players missed only one of twenty foul shots.  The player will not lose his house to a creditor if he misses a foul shot every now and then.  Things are very different, however, for a surgeon.  A surgeon can perform flawlessly in thousands of operations over a thirty year period.  Yet a single mistake in a single operation may result in a catastrophic judgment that could place at risk all the assets he or she has ever accumulated.  Physicians therefore need to take full advantage of all reasonable, lawful asset protection opportunities.

A physician should carry a reasonable amount of malpractice insurance.  Most judgments for medical malpractice will not exceed the insurance limits.  To the extent that the physician can choose the insurance carrier, he or she should carefully investigate the alternatives.

Unfortunately malpractice insurance is the starting point but not the ending point for a solid asset protection plan.  In subsequent posts over the next several weeks I will address some of the steps that every physician should be taking to lawfully protect his or her assets.  These steps include a focus on how assets are titled; maximizing contributions to qualified retirement plans; trust arrangements; and various other alternatives. 

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