Written By Hermes Conesa, MBA, CSLP®
Asset protection for physicians is a big deal. As your career grows, so do your assets. Protecting those assets from lawsuits, divorces and accidents must be top of mind for your long-term financial security.
An asset protection plan can be as simple as titling your accounts correctly or involve complex strategies, like certain types of trusts. The end goal is always to protect assets from creditors in the event of a lawsuit.
Financial planning ahead of time is the best strategy. Any asset movement after you're sued can be viewed by the court as you trying to hide those assets, which won’t do you any favors.
NOTE: Asset protection state laws can vary. Always seek professional assistance from a qualified lawyer or financial planner.
Below are a few strategies you can employ to protect your hard-earned assets as a physician today.
1. Malpractice insurance
The first step to safeguarding your assets is ensuring you have the right insurance as a service provider. As my fellow colleague, Sim Terwilliger, CFP® CSLP®, put it, “One of the biggest threats to your career is a lawsuit”.
That's likely why malpractice insurance is among the first insurance products physicians learn about. This type of insurance protects you against any claims of negligence or errors brought against you by a patient, including allegations of injury or harm. It typically covers legal expenses, defense costs and settlements.
There are different types of policies to consider: occurrence-based and claims-made.
Occurrence-based
Occurrence-based policies cover claims that happened while the policy was active, even if the claim is filed after the policy ends. On the flip side, coverage for a claims-made policy typically ends when the policy is canceled or not renewed.
Claims-made
A claims-made policy can be useful when you change jobs or retire. It offers tail coverage to financially protect you against any claims made after you leave the profession or until the policy is canceled.
If you work for a hospital, government facility or university, it might offer malpractice insurance as a benefit. However, if you moonlight and provide care that’s outside of your primary employer’s coverage parameters, you need your own claims-made malpractice insurance policy.
If you have your own private practice, you should also have malpractice insurance to protect against any claims brought by your patients. There’s a lot more to it, but it’s a basic component of an asset protection strategy that every physician needs.
2. Umbrella insurance
Umbrella insurance is a type of liability insurance that provides coverage in addition to the limits of your existing primary policies, such as homeowners, auto or boat insurance.
If you’re sued for damages that exceed your current insurance, umbrella insurance provides a safety net above the primary policy’s amount. For example, if your auto insurance covers up to $300,000 and you’re sued for an amount above that $300,000, the umbrella might potentially cover the excess amount up to any policy limits.
Umbrella insurance policies are generally very inexpensive and relatively easy to obtain.
Unfortunately, we live in a litigious society, and physicians are always at risk of being sued. As a physician, umbrella insurance can cover you, especially if you’re exposed to higher liability risk or have assets you wish to protect.
3. Titling of assets
When you’re married, there are multiple ways you can own assets with your spouse. One very popular way to protect your assets from creditors is to title them as tenancy by the entirety. Not all states offer this type of account title, but if yours does, you should seriously consider using it to protect your assets.
For example, if you buy a house, tenancy by the entirety allows both spouses to own an equal interest in a real estate property. If one gets sued for debt the other is not responsible for, creditors will not be able to come for that property. On the other hand, if both are responsible for the debt in question, the property will not be protected from creditors.
Another benefit of titling assets this way is that it offers rights of survivorship. If one spouse passes away, the property will transfer 100% to the surviving spouse.
4. Life insurance
In some states, the cash value and death benefit in a permanent life insurance policy are typically protected from creditors. Thus, having sufficient life insurance can safeguard its cash value from creditors for probate estate planning purposes and asset protection.
This is one time a permanent life insurance might make sense for a physician.
5. Prenuptial agreement
A divorce is an extremely stressful situation for anyone, including physicians. An often-overlooked asset protection strategy is a prenuptial agreement, or “prenup.” A prenup safeguards assets if you or your spouse ever decide to get a divorce.
Any assets accumulated during marriage are considered marital property. During a divorce, marital property — including your medical practice if you opened it while you were married — must be divided. A prenup can help separate your assets, including safeguarding your medical practice, during a nasty divorce.
Unfortunately, divorce rates are high. Don’t wait until it's too late to seek couples therapy if you feel your relationship isn't heading in the right direction. Often an intermediary can add tremendous value to the relationship, opening your eyes to habits and ideas that support both you and your spouse.
Related: Who Claims the Children? A Post-Divorce Guide to Understanding IDR Plan Eligibility
6. Retirement accounts
Some retirement accounts are protected from creditor claims, especially those inside an Employee Retirement Income Security Act “ERISA” plan, like a 401(k) or 403(b).
According to the Department of Labor, your retirement plan is generally safe from claims by other people. Creditors to whom you owe money can’t claim against funds that you have in a retirement plan.
Non-ERISA plans, like traditional IRAs or ROTH IRAs, don’t always offer the same level of protection as ERISA plans.
Contributing the maximum amount to your qualified retirement account makes sense from an investment accumulation standpoint while also protecting your assets from a creditor suit.
7. Trusts
A trust is a legal entity separate from an individual — in this case, you, the physician. When you create a trust, you’re transferring your assets to a third party or trustee. The trustee oversees managing the trust’s funds for the benefit of the beneficiary. Essentially a trust provides a barrier between you and your creditors.
Keep in mind there are different types, such as revocable and irrevocable trusts. If your assets aren’t significant and are relatively straightforward, you might not need to create a trust.
Always seek professional guidance. If you decide to create an asset protection trust, consider hiring an experienced lawyer. An asset protection attorney can help you navigate the legalities of this strategy and your alternatives.
8. Business structure
If you have a private practice, the type of corporation you create can help provide personal liability protection. For example, if you create a limited liability company (LLC) or corporation, this can ensure that a lawsuit doesn’t result in personal exposure to creditor claims.
Be careful in piercing the corporate veil. This can happen in certain circumstances, but the most common example is when a practice owner commingles their personal assets or funds with that of the corporation.
If you’re using your corporate assets to pay personal expenses, for example, a court might see this as piercing the corporate veil and hold you personally liable. Always keep your corporate accounts separate from your personal accounts, and maintain good record-keeping.
9. Invest in self-care
High levels of stress increase burnout, which in turn could lead to malpractice lawsuits. Learning how to manage stress effectively might help reduce work-related negligence.
Prioritizing self-care through regular exercise, nutrition, adequate sleep, meditation and yoga are steps you can take to improve your stress levels.
Spend quality time with your loved ones. After all, what’s the point of asset protection for doctors if not to enjoy them with your family? In addition to turning to the support of your loved ones as a means of self-care, don’t forget about professional support. Seek therapy if you need to address emotional issues.
The healthier you are in mind, body and spirit, the better equipped you are to make better decisions in your profession. It strengthens your productivity, possibly minimizes professional errors, and ultimately aids in safeguarding your assets.
Protecting your assets doesn’t have to be complicated. Seek help from a financial professional to address your unique situation sooner rather than later.
