Asset Protection for the 21st Century - a Lawyer's Perspective
As the son of a doctor, I grew up on a steady diet of how our income tax structure is regressive by penalizing the producers and subsidizing the indolent. Later, I got an earful on how Medicaid and HMOs were ruining the practice of medicine by pulling control from doctors and giving it to bureaucrats who were as clueless about medicine as they were about politics. When I began my practice 20 years ago, I decided that my focus should be on how to keep the bad guys (IRS) from bleeding the good guys (doctors) dry. I felt good about what I did. Now, much of the focus has shifted to asset protection. Even the IRS doesn't take 100%, which is what the bad guys today are trying to do.
The latest assault against physicians has been launched by personal injury attorneys chasing not only ambulances but doctors' malpractice policies. Successful verdicts have led to astronomical increases in malpractice insurance premiums. Many physicians have been forced to reduce coverage to help keep costs in line. Doing so has only increased their exposure. For example, if coverage is reduced from $1,000,000/3,000,000 to $250,000/750,000, a physician is personally liable for the account of a claim in excess of $250,000. How many malpractice lawsuits are for less than $250,000? How secure do you feel?
Asset protection is one of the hottest topics for doctors today. In our law practice we focus on ways to help our clients protect their assets and enable them to sleep well at night. The following is a checklist of various types of assets and ways to protect them. For more detailed analysis, look for future articles in your County Line.
Stocks, Bonds, Mutual Funds, CDs. The first asset a judgment creditor will go after are liquid assets - cash and securities which are not held in an IRA or other qualified retirement plan. Fortunately, these are easy to protect.
The entity of choice is a family limited partnership (FLP). Assets held in an FLP are beyond the reach of creditors. No creditor can attach your assets, force you to distribute your assets or dissolve your FLP. You maintain 100% control and ownership of your FLP and the assets held by it. The asset protection benefits are effective immediately. Costs to create an FLP range from $1500 to $2500, plus initial filing fees of $360. The annual fees to the Secretary of State to maintain the FLP are only $85.
Home. A homestead offers very little protection for your home. At best it's a deferral - not an avoidance. Essentially, a homestead prevents a creditor from foreclosing on your primary residence as long as your equity is less than $125,000. Your home can be liened immediately, thereby preventing you from (1) refinancing, (2) taking out a second mortgage, or (3) moving. As soon as the equity exceeds $125,000, your creditor can begin legal action to foreclose.
An allodial title exemption protects an unlimited value for your home, but still has its drawbacks. To obtain an allodial title, you must have paid all debts on the home and all present and future property taxes based on your life expectancy. Your home is still liened by the creditor; he is merely precluded from foreclosing as long as you live there. If you move or die, the creditor can foreclose.
A qualified personal residence trust (QPRT) affords a greater degree of protection than a homestead or allodial title exemption. Unlike those, a creditor cannot even lien your home. You stay in complete control as trustee of your trust. You retain all of the income tax benefits of home ownership, such interest and property tax deductions, and the $250,000 for singles or $500,000 for couples capital gain exclusion. You can sell your home at any time and the proceeds are protected. When you purchase another home, it can be held in your QPRT and will be similarly protected. The QPRT can hold property in any state. In essence, you maintain all of the ownership, benefits and use of your home, but a creditor cannot attach it. The asset protection benefits are effective immediately. The costs to create a QPRT range from $2,500 to $3,500. This is a one-time expense. There are no maintenance fees or future costs.
Rental Property. The entity of choice for rental property is a limited-liability company (LLC). By owning your rental property in an LLC, you are not personally liable for anything that may happen on the property. Conversely, no creditor of yours can lien the property. The asset protection benefits are effective immediately. The costs to create an LLC range from $1,500 to $2,000, plus initial filing fees and costs of $420. The annual fees for the Secretary of State to maintain the entity are only $85.
Medical Equipment. An LLC is also recommended to hold medical equipment which you use in your practice. Your equipment can be held in your LLC and leased to your professional corporation. This removes it as an asset to be attached in a malpractice claim. This also creates an additional liability at the corporate level, making your professional corporation a less desirable target.
Life Insurance. A creditor can attach any cash value which you may have in a whole life or universal life insurance policy. The entity of choice to protect these is an irrevocable life insurance trust (ILIT). Holding insurance in an ILIT not only places the cash values beyond the reach of creditors, but also removes the proceeds from your taxable estate. Most people are aware that life insurance proceeds are income tax free. Many do not realize that the proceeds are not estate tax free unless held in an ILIT. It really doesn't make much sense to own insurance individually where it thereby is exposed to attachment by creditors and will be included in your taxable estate, especially when both problems can easily be avoided. The costs of creating an ILIT range from $1,500 to $2,500. It is a one-time expense. There are no annual maintenance fees or expenses.
IRA's, 401 (k)'s, Retirement Plans. Under Nevada Law, funds held in an IRA, SEP, 401(k), pension, profit sharing or other retirement plan are exempt up to $500,000. Funds in excess of this amount are subject to attachment.
What your Living Trust Won't Do. A common misconception is that living trusts provide asset protection during your life. This simply is not the case. A living trust can avoid probate, can minimize or eliminate estate taxes and can protect one-half of the estate after the death of a spouse. While these certainly are desirable objectives, they do not offer any asset protection benefits to a practicing physician during his or her life. The costs of creating a A/B or A/B QTIP living trust range from $1,500 to $2,000. The costs of creating a "generation-skipping" or "dynasty" type of family trust range from $3,000 to $3,500.
New Nevada Asset Protection Trust. Nevada is one of only three states to adopt laws enabling you to create a trust specifically for asset protection. You can be a trustee of your trust, maintain control over your funds and keep the bad guys out.
In order to achieve maximum protection, we recommend that you do not retain direct control over the assets in your trust by serving as the sole trustee of the trust. It is preferable to have an "independent" trustee who controls distributions from the trust. This distribution trustee usually is a relative, trusted friend, or a trust company. To safeguard your interests, the distribution trustee does not have the right to distribute assets to anyone other than you or to someone you designate. You have the ability to remove the distribution trustee at any time and appoint a new "independent" trustee. As a further protection, if you are being sued or if your assets are in jeopardy, the distribution trustee cannot distribute assets until the threat ceases. You serve as the investment trustee and as such, maintain complete control over all investment decisions and indirect control over all distributions.
The trust is effective against claimants beginning two years after the trust is created and assets are transferred. Because of this two year window of opportunity by a creditor, most physicians use FLPs and/or LLCs (which provide immediate protection) in conjunction with their asset protection trust (APT). The costs of creating an APT range from $2,500 to $3,500.
Why Don't All Physicians Have the Maximum Protection Available? That's a question I've asked myself many times and haven't come up with a satisfactory answer. With all of the uncertainties of life, bizarre outcomes of lawsuits and exorbitant jury awards, you can never be too safe. You can realize huge benefits by arranging your affairs now in such a way to protect yourself from the unforeseen. Nevada law affords you huge protections. Why not take advantage of them? The cost of establishing a complete asset protection plan costs far less than a year's malpractice premium and can protect you throughout your life. It's the gift that keeps on giving.
When is the Best Time to Get Started? Nevada law prohibits using asset protection techniques to hinder, delay or defraud existing creditors. Your asset protection entities are not effective against current claims. They will only protect you from future liabilities. Therefore, the best time to create an asset protection trust is before a claim arises.
Getting it All in Place. The attorney you select to assist you in creating your asset protection plan will make a substantial difference in the results obtained. We recommend that you use someone who practices in this area as a significant part of his or her practice. Your attorney will typically offer a no cost, no obligation appointment to discuss these issues with you. With the holidays approaching, what better gift can you give to yourself and your loved ones than the peace of mind of having all of your legal affairs, especially your asset protection, in place?