Too many physicians, including dermatologists, over the last decade have sought cookie-cutter asset protection plans to give them some “peace of mind” that if they ever endure an outrageous malpractice case, they won't lose everything. While we admire these doctors' commitment to pro-actively managing their risk, we have to remind doctors that all “asset protection plans” are not created equal. In fact, many will not even “work” if they ever need to be relied on for coverage.
Why is this? Essentially, it is because of a basic tenet of asset protection—that any asset protection plan that will truly stand up if challenged must have economic substance. Taken a step further, superior asset protection planning involves tools that are primarily used by people for nonasset protection purposes. In this way, the best asset protection plan involves tools typically not thought of as “asset protection tools.” In other words, “the best asset protection is not asset protection.”
Just Like Tax Planning
While few dermatologists realize this crucial fact of asset protection planning, all of the leading attorneys in the field know it quite well. In fact, we are not alone, as tax attorneys and CPAs know this adage is also just as true when it comes to tax planning.
Simply put, when determining whether or not a particular transaction with significant tax benefits was an illegitimate tax shelter or not, the IRS or tax court typically uses a simple test: “Would a taxpayer have done this deal if not for the tax benefit?” In other words, the IRS is asking whether or not this transaction was simply done to save taxes or if it was done for another economic purpose? If there was such a purpose, the transaction stands; if it was only tax-motivated, it fails.
This same test applies when evaluating whether or not a creditor protection tactic will be upheld if ever challenged down the road. Here, the question is “did this transaction have an economic purpose… or was it simply done for asset protection purposes?” If you are using tools that millions of American use daily for non-asset protection purposes, you can convincingly answer “yes.
Asset Protection as a Sliding Scale
In the 11 books either of us has written for doctors, including our latest national text, For Doctors Only we use a sliding scale approach to evaluate asset protection techniques— with the lowest (-5) being an asset that is completely vulnerable and the highest (+5) being an asset that cannot be taken by a creditor even in bankruptcy. This is important to understand here because every +5 asset protection technique, whether in a personal or practice implementation, has significant economic benefits to the client, irrespective of asset protection.
Asset Protection That Isn't
Which asset protection tools are not asset protection tools? Let's examine a few of them briefly.
A. Qualified Retirement Plans. The term “qualified” retirement plan means that the retirement plan complies with certain Department of Labor and Internal Revenue Service rules. You might know such plans by their specific type, including pension plans, profit sharing plans, money purchase plans, 401(k)s, or 403(b)s. Properly structured plans offer a variety of real economic benefits: you can fully deduct contributions to these plans and funds within them grow tax-deferred. In fact, this is likely why most medical practices sponsor such a plan.
What you may not know is that under federal bankruptcy law, and nearly every state law, these plans are protected against lawsuits and creditor claims—enjoying +5 protection status. IRAs are also +5 protected in bankruptcy, with some limits, although their state protection depends on the state. For both, the overwhelming majority of millions of Americans who use qualified plans and IRAs are not using them for asset protection purposes. This, then, is a great example of attractive economic tools that just so happen to have tremendous asset protection benefits as well.
B. “Hybrid” Qualified/Non-Qualified Retirement/Fringe Benefit Plans. Non-qualified plans are relatively unknown to physicians, despite the fact that they are right in the tax code. These types of plans should be very attractive to physicians, as they can be terrific hedges against future tax increases and they can be used in addition to qualified plans. Once again, hybrid plans and fringe benefit plans are generally not used for asset protection purposes, but they may have such benefits, depending on how they are structured.
C. Captive Insurance Companies (CICs). CICs are used by many of the Fortune 1000 companies, for a host of strategic reasons. In a medical practice setting, the owners of a medical practice actually create their own properly licensed insurance company to insure various types of risks of the practice. These can be economic risks (reimbursements drop), business risks (electronic medical records are destroyed), litigation risks (coverage for defense of harassment claims or HCFA audits), and even medical malpractice (keeping some risk in the captive and reinsuring the rest). If it is created and maintained properly, the CIC is like any insurance company— established in a real economic arrangement with its insureds. Also, CICs can enjoy tremendous creditor protection (+4/+5) if the ownership is structured properly.
D. Cash Value Life Insurance (CVLI). CVLI policies are purchased by millions of Americans each year for their tax benefits (generally, tax-free growth, pays income tax free to heirs), for family protection and for estate planning purposes. Nonetheless, in many states, the cash value can enjoy the top +5 protections. In this way, a physician can purchase a product that is widely recognized as a part of a financial plan and enjoy +5 protections easily.
Dermatologists who have implemented generic “asset protection plans” may be disappointed if they are ever attacked—as these plans may be ignored by courts that see no economic substance. On the other hand, those who implement techniques such as those described above may be pleased; not only will their protection be upheld, but they may build significant wealth along the way.
The authors welcome your questions. You can contact them at (877) 656-4362 or through their website, www.ojmgroup.com.
For a free hardcopy of For Doctors Only: A Guide to Working Less & Building More, please call (877) 656-4362. If you would like a free, shorter eBook version of For Doctors Only, please download our “highlights” edition at www.fordoctorsonlyhighlights.com
David B. Mandell, JD, MBA is an attorney and author of five national books for doctors, including, FOR DOCTORS Only: A Guide to Working Less & Building More,
as well a number of state books. He is a principal of the financial consulting firm OJM Group (www.ojmgroup.com) along with Jason M. O'Dell, MS, CWM, who is also a principal and author. They can be reached at 877-656-4362 or firstname.lastname@example.org
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This article contains general information that is not suitable for everyone. The information contained herein should not be construed as personalized legal or tax advice. There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances. Tax law changes frequently, accordingly information presented herein is subject to change without notice. You should seek professional tax and legal advice before implementing any strategy discussed herein.