Fatal Flaws in Physicians’ Asset Protection Planning - Part I

During my practice with a client base of thousands of doctors I have seen the best and the worst of asset protection planning available to the American public as well as the most common flaws evident in both self-directed planning and plans executed by “professionals” who do not practice primarily in this area.

Below is the first part of a short summary of “fatal flaws” to keep in mind when addressing this crucial issue. Please bear in mind that information in forums like this is not specific to you, is written in the broadest terms and is never a substitute for consulting with an experienced professional:

1. FAILING TO ACT (Timing) - Asset Protection is best analogized to “net worth insurance” and like insurance you have the best, most effective and legally supportable options available to you when you implement the planning before a crisis exists. Transfer of assets into plans after you have specific exposures is costly, ineffective, and some cases illegal (fraudulent conveyance). The best time to act is always now and every day that passes makes your planning stronger.

2. THINKING YOU’RE NOT RICH ENOUGH - A sin I see committed on a weekly basis, often by professionals like lawyers, CPAs, and financial advisors. Advisors often tell clients that they are not rich enough to do any planning and that that they should have a net worth north of $5 million or even $10 million to consider it. Nothing could be further from the truth, especially if you are in the “fall” of your earning career. All you have is important to you and there are precautions that can be taken at any net worth level. When should you start? There are many simple ways to analyze this but here is an easy one, answer these questions:

• If you lost what you have today, or some significant portion of it, are you at an age, earning level, and financial condition that will allow you to maintain your family’s goals and expenses?• Do you have assets that would be difficult or impossible to replace given your age, health, and economic conditions?

• Are you financially and legally prepared for a lawsuit that is either uncovered by liability insurance or which often produces verdicts above the limit you are carrying?If you’re not comfortable with your answers, it’s time to take responsibility and action for your financial future.

3. RELYING ON YOUR TRADITIONAL ESTATE PLANNING - “I’ve got this covered, I think. I have my home, cars, and investments all titled in my trust.” This is something we hear often. The layperson usually feels that a transfer of these assets to a vehicle like an estate planning trust, like a Revocable Living Trust, is effective asset protection; it’s not. The first word in the trust is “revocable” and in most cases a judge will simply order you to revoke the trust and tender the assets for a judgment. That is death planning. What has been done about your life planning and the exposures you face every day practicing your profession, driving a car, having children (some driving your car), or having employees…?

4. TOO MANY EGGS IN ONE BASKET- Others implement a good tool like an LLC as a barrier between themselves and their investments, but fail to adequately segregate and subdivide assets so that they are protected from the owner and each other. A common example is the case of the property owner who has single LLC that is legally and financially responsible for a wide variety of properties that have different levels of liability, equity, and use. If you call and say you have $5,000 to 10,000 down on four new short sale properties in a single LLC, it’s probably OK, because your total exposure is theoretically limited to $20,000 to $40,000, the value of the LLC’s assets. On the other hand, if you call and say that you have seven pieces of real estate with a total equity position of six or seven figures, some paid for, some all debt, including a triplex, a lot, and a commercial strip mall, I’m going to start sweating on your behalf. Why? Because any exposure at a new, zero equity property could wipe out your entire portfolio of paid for or partially paid for properties. Assets must be divided based on use and equity as well as into the right kind of legal vehicle, among many other factors, as we will cover more thoroughly in Part II of this article next week.