Having endured countless hours of hard work and dedication to reach your current level of success, the thought of it all being lost due to an unfortunate medical malpractice or accident can be downright terrifying. The worry and anxiety that come with the thought of losing it all can manifest in sleepless nights, leading to fatigue and stress that can have negative impacts on both your physical and mental health.
1. Insufficient Umbrella Liability Insurance Coverage
It is essential that physicians have sufficient umbrella liability insurance coverage to protect themselves in case of a lawsuit. Policies usually cover up to $2-5 million worth of liability and cost approximately $400-$1200 per year, which is a relatively low price to pay for peace of mind. Homeowner’s insurance and auto policies provide some protection against legal action, but an umbrella policy helps fill the gaps that primary policies may not cover.
2. Proper Titling of Assets
Titling assets correctly can be an important factor in protecting wealth in the case of a lawsuit. For married couples, titling assets as “tenants by the entireties” implies that both spouses have equal ownership, and that in the event one spouse is sued, their joint ownership of the asset protects it from being seized. This strategy works best in states with laws that protect marital property. However, some couples try to protect their wealth from potential malpractice lawsuits by putting all of their assets in the name of the non-physician spouse; this exposes those assets to any creditors or lawsuits against either spouse, despite not offering any real protection. In many states, when both spouses are on a title, marital property cannot be taken by any lawsuit against either of them.
3. Creditors Can Seize Assets Held in Living Trusts
One common mistake people make is assuming that assets held in a Living Trust are protected from creditors. Living Trusts are established during one’s lifetime to hold assets that can be passed on without going through probate after death. While Living Trusts can be helpful for segregating assets and maximizing estate tax savings, this is no longer necessary. Additionally, Living Trusts are “revocable”, meaning that the grantor, or the person who established the trust, can move assets in and out of the trust at their discretion. If a judge orders the grantor to pay off a creditor, they can also compel the grantor to move assets out of the trust. In contrast, only Irrevocable trusts provide asset protection, particularly for inherited money. Since the grantor is deceased, Irrevocable trusts cannot be altered, providing excellent asset protection as long as the grantor is not the sole trustee.
The trend towards the establishment of self-settled, irrevocable trusts has grown in recent years, particularly in certain states. These trusts offer a degree of asset protection from creditors, although the effectiveness of these vehicles are yet to be fully tested when it comes to litigation. To complicate matters further, there remains uncertainty over whether courts from different states will honor requests for funds from one state court to another, especially if that state does not recognize the legitimacy of self-settled trusts. Therefore, individuals seeking to protect their assets through this route should proceed with caution.
4. Safeguarding 401Ks and IRAs
Federal law protects 401k and defined benefit plans from creditors. However, protection for IRAs, whether Roth or Traditional, is determined by state law. Federal protection, typically in the event of bankruptcy, applies to IRAs that contain only rollover qualified retirement funds and has a limit of $1 million on traditional IRA assets. Combining different types of IRAs may needlessly expose assets to creditors. It is important to research how your state treats these retirement accounts, particularly before rolling over a large pension plan into an IRA. Additionally, some states do not protect Inherited IRAs, so it is important to keep this in mind if you plan to leave a large IRA to someone in an “unprotected” state or if you expect to inherit an IRA while living in such a state.
5. Transferring Your Assets to Your Descendants
A trust is an effective way to protect assets left for your heirs from future creditors and ex-spouses. When setting up the trust, choose a trustee who is not a direct beneficiary of the trust, and consider establishing provisions that prevent the forced disbursement of funds. This protects money intended for your children against claims from spouses in subsequent marriages. Additionally, by adding stipulations to the trust, you can provide income for a second spouse while still protecting the inheritance for your children from your prior marriage.
6. Remove Your Name from Titles of Assets You Cannot Manage
A common and dangerous mistake that physicians often make when it comes to asset protection is allowing their name to remain on the title of something they have no control over. For example, adult children of doctors may still have their parents’ name on a car title, thereby opening them up to being included in any lawsuit stemming from their child’s driving. Similarly, vehicles associated with high liability risk such as snowmobiles, jet skis and boats used by “friends” can also lead to legal action if an accident or other incident occurs. In all these cases, physicians need to take the precautionary step of removing their name from the title of items they do not control in order to protect themselves legally and financially.