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

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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Irrevocable life insurance trusts (ILITs) can be a great estate planning tool under the right circumstances. ILITs have the added benefit of providing significant asset protection. 

Life insurance owned by an ILIT is not generally part of the insured’s estate (for both federal and Ohio estate tax purposes).  An ILIT will be most effective if it is formed prior to acquisition of the life insurance policy.   The ILIT directly purchases the insurance policy or policies. If the ILIT is formed properly creditors of both the settlor (the person establishing the trust) and the beneficiaries should have no rights in either the cash value or the death benefits of the insurance.

Assets of an ILIT should also generally be immune from claims in a divorce or dissolution of marriage. An ILIT (unlike certain other trusts such as so-called marital deduction trusts, credit shelter trusts and/or QTIP trusts) may also provide for termination of a spouse’s interest in the event of remarriage.

Whether or not an ILIT is suitable depends on the particular facts and circumstances. Moreover, the insured has to effectively give up control of the assets held in this type of trust; and the fees and expenses to set up such a trust also have to be considered. In some circumstances, however, an ILIT can be a valuable estate planning tool, and also provide significant asset protection opportunities.

An ILIT is definitely not going to constitute a complete asset protection plan.  But it may be very useful as one of the components of such a plan.

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There are many asset protection strategies, and the more expensive and complex ones are not always the best.  I like the comment made by Jay Adkisson (a nationally recognized asset protection planner) in the May 11, 2009 issue of Forbes Magazine.  He basically says the best ways are the old ways.

While that is a big generalization, there is a lot of truth in it.  Offshore trusts, so called "domestic asset protection trusts" (permitted by statute in states like Alaska and Nevada) and other more exotic asset protection techniques may all have their place --  given the right circumstances.  But for most executives, small business owners, physicians, and others in need of asset protection, more traditional devices should be considered first.  Simply dividing certain assets between spouses may be helpful.  Many  traditional trust arrangements, including an irrevocable life insurance trust (ILIT), can often provide significant protection.  So can one or more limited liability companies.  They are easy to set up and provide excellent protection when properly utilized.   Using a family limited liability company in conjunction with a revocable trust can be a relatively inexpensive way to protect assets, and potentially provide significant estate tax savings.

I advise clients to focus initially on traditional, relatively less expensive asset protection strategies.  If those appear inadequate, then consider other alternatives.  But do not start with the assumption that you need an offshore trust in order to reasonably protect your assets.  Many more ordinary arrangements may provide all the protection you reasonably need -- without many of the drawbacks of more complex arrangements.

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