PracticalDermatology

Lawsuits and liability lurk in the background for dermatologists and physicians of all specialties. This reality of medical practice in today’s world means that it’s wise for dermatologists to engage in asset protection in order to protect themselves from any possible future litigation. As we noted in part one of this two-part article series, when it comes to asset protection, there are many types of tools to utilize. These include ownership forms with spouses, assets that are exempt under state or federal law, and trusts, as well as the most widely used legal structures for physicians—limited liability companies (LLCs) and family limited partnerships (FLPs).

In the part one, which you can read at PracticalDermatology.com, we defined what LLCs and FLPs are and discussed how they can protect a physician’s wealth from litigation. Ahead, in this second installment, we will discuss a few tactics a dermatologist can use to maximize the protections of LLCs and FLPs.

1. Don’t Put All Your Eggs In One Basket
One never knows when a court of law is going to make a surprise departure or deviation from accepted legal norms or precedents. Because savvy dermatologists understand that they cannot control court decisions or the litigious nature of society, they protect their assets by using multiple FLP/LLC arrangements to title their assets. Titling your assets in different legal entities makes it more difficult for any creditor to come after your entire wealth because they may have to conduct more investigations, file more motions with the court, and perhaps even travel to different states. The more entities used, the more difficult it will be for your creditors to attack your wealth. As a result, creditors will be more likely to negotiate more favorable settlements.

2. Segregate the Dangerous Eggs From the
Safe Ones
Before understanding the significance of this strategy, you must first understand the difference between “safe” and “dangerous” assets.

“Dangerous” assets are those that have a relatively high likelihood of creating liability. Common dangerous assets include real estate (especially rental real estate), cars, RVs, trucks, boats, airplanes, and interests in closely held businesses.

“Safe” assets, conversely, are those that are unlikely to lead to lawsuits. Common safe assets include cash, stocks, bonds, mutual funds, CDs, life insurance policies, checking and savings accounts, antiques, artwork, jewelry, licenses, copyrights, trademarks, and patents.

Separating safe assets from dangerous assets increases the “inside” asset protection for the safe assets. In other words, since no dangerous assets are within the same entity as the safe assets, a lawsuit arising from a dangerous asset will not threaten the safe assets if the safe assets are in their own LLC.

3. If Possible, Use LLCs or FLPs in the Most Protective States
Not all LLCs and FLPs are created equal. It is true that LLCs and FLPs vary greatly in their asset protection, estate, and tax benefits based on the experience and expertise of the attorney drafting the operating agreement. However, the point here is that some states have much more protective language in their LLC or FLP statutes.

For some assets, like investment accounts, you may have the option to use LLCs or FLPs in states that are more protective than your own. For example, states like Nevada, Ohio, and Delaware have passed extremely restrictive LLC statutes designed to provide the highest level of protection for entities established in their state. In theory, this is no different than why so many Fortune 500 companies are based in Delaware—the laws there are the most protective of corporate officers and boards.

Today, many dermatologists use an investment firm based outside of their state, and assets at these firms may actually be held by a large custodian (like Schwab or TD Ameritrade) in a third state. Investment assets, as opposed to real estate which always sits in one fixed place, may be suitable for ownership in an LLC out of your home state. This type of “jurisdiction shopping” is found in numerous areas of the law, including estate planning, tax planning, and regulatory planning.

As an example, you might live in State X and set up an LLC in Ohio for its top-level protection laws. Your litigation risk still resides in your home state where you live and practice medicine. Certainly, if you were ever sued, it would likely be in your home state, and if your LLC were attacked by a plaintiff in your home state, a court overseeing that lawsuit may be inclined to apply local law even with respect to an Ohio LLC. Nonetheless, if the costs of using a “better LLC state” like Ohio are not much more (or are even less) than setting up an LLC in your home state X, then we generally recommend it, as you can save costs and perhaps avail yourself of better protection rules. In essence, if it doesn’t cost you a lot more to use a more protective state, there is really no reason not to so do.

4. Adhere to All Formalities
Regardless of the state where an LLC/FLP is formed and the assets it owns, the legal entity must follow all formalities in order to enjoy the protections it can be afforded under the law. This includes timely filing of tax returns and legal documents, conducting annual meetings and documenting meeting minutes and consents. A crucial formality that many physicians ignore is to avoid any commingling—LLCs/FLPs should pay for any expenses related to their operation but not pay for personal expenses of the owners (physician and family members).

Conclusion

LLCs and FLPs are often the building blocks of dermatologists’ asset protection planning. To get the protection they can afford, implementation of the above tactics is essential.

The authors have recently completed Wealth Planning for the Modern Physician. To receive free print copies or ebook downloads of this book or Wealth Management Made Simple, text PRDERM to 844-418-1212, or visit www.ojmbookstore.com and enter promotional code PRDERM at checkout.

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This article contains general information that is not suitable for everyone. Information obtained from third party sources are believed to be reliable but not guaranteed. OJM makes no representation regarding the accuracy or completeness of information provided herein. All opinions and views constitute our judgments as of the date of writing and are subject to change at any time without notice. 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.