Are your assets exposed?

Asset protection is a crucial but often overlooked part of financial planning. Misperceptions and myths abound in conventional wisdom when it comes to asset protection, ranging from “you don’t need to worry about asset protection, you have insurance” to “just put the assets in your spouse’s name – it’ll protect you.” Here, we examine several of these common misperceptions

1.  “Your Insurance Protects You”

Property and casualty (P&C) insurance is an important part of any asset protection plan, but an insurance policy that is 50 pages long rarely gets read by the buyer, let alone analyzed or understood. Insurance policies all have a variety of exclusions that can create unexpected gaps in coverage. This is true for personal policies, like homeowner's, car and even umbrella insurance; as well as business policies, the most important of which for physicians is medical malpractice.

Chekout: Which asset protection to choose is a matter of degree

Even if your policy does cover the risk in question, there are still risks of the claim going beyond coverage limits (malpractice judgments do periodically exceed traditional $1/3 million coverage), strict liability, and bankruptcy of the insurance company.  In any of these cases, you could be left with the sole responsibility for the loss.  In addition, even if all of your losses are covered within coverage limits, a claim could cause future premiums to skyrocket.

For these reasons, it is unwise to rely solely on insurance for your protection, especially when many asset protection techniques will generally save taxes and help you build retirement wealth.

2. “You Don’t Need a Professional Corporation (PC)”

The main justification for this point of view seems to be the expense ($1,000 or so to create, and a few hundred dollars per year) and the additional paperwork (tax return, minutes, etc.). However, when you fail to use a PC or other similar entity (PA, PLLC) to run your practice, you expose all of your personal wealth to any claim originating in the operation of the practice.  While the PC will not protect your assets from malpractice, it do take into account other liability risks created by employees.  For example, consider car accidents employees might get in when driving for the business (receptionist going to pick up lunch for the office) or a slip and fall in the office, or car accident in the parking lot, among many others.  Implemented correctly, a PC protects your personal wealth against all of these potential liabilities and more-without one, all of your personal wealth could be vulnerable.

NEXT: Common misperceptions 3 & 4 

3. “Use a ‘Disregarded Entity’ for Tax Purposes”

Related to the mistaken notion that a physician should avoid using a PC is this more-common misguidance for solo physicians; to have a professional entity, but to choose to have the entity taxed as a “disregarded entity” by the IRS. Essentially, a sole-owned LLC can elect not to be treated as a separate entity but, instead, to be treated as a “disregarded entity” where the profits or losses simply flow to Schedule C of the tax return of the sole owner (physician).  Unfortunately, with this strategy, the physician assumes the same risk as having no entity at all, and a lawsuit against the practice could potentially attack all of the doctor’s personal assets, even if he was totally uninvolved in the activity that created liability.

Checkout: Protecting inventions is complex, costly, crucial

4.  “Just Put Your Assets in Your Spouse’s Name”

Many people believe erroneously that assets in a spouse’s name cannot be touched. To see how this legal interpretation is wrong, ask yourself:

• Whose income was used to purchase the asset?

• Has the doctor used the asset at any time?

• Does the doctor have any control over the asset?

• Has the doctor benefited from “the spouse’s assets” in any way?

If the answer is “yes” to any of these questions, most courts find that at least half of the value will be exposed to the claims against the doctor. In community property states, it may be 100% of the value, as a community asset.

Checkout: Get your practice vibe on!

Another good litmus test is to ask your financial advisor what she thinks will happen in a divorce if you put all the assets in the spouse's name.  It’s a safe bet that your advisor will say that the court will treat these assets as joint because you are still treating them as joint (living in the house, spending the accounts, paying the taxes). Therefore, the court knows that you haven't really given the assets away to the spouse.  Most likely, this is exactly the way the court will treat the assets for creditor purposes as well.

NEXT: How to protect yourself

How to protect yourself

Each physician has a differing set of circumstances and needs. Consulting with tax and legal professionals before implementing any financial strategy can provide you with the background knowledge you need to create an approach that will protect your assets. Tax laws change frequently, so regular consultation with your professional tax advisor is key.

The general information presented here may not be suitable for everyone and should not be construed as personalized legal or tax advice.

David B. Mandell, JD, MBA, is an attorney and author, as well as a principal of the financial consulting firm OJM Group. Carole C. Foos, CPA is a tax consultant at OJM Group.