How To Protect Assets from Litigation As A Physician
Medical malpractice lawsuits against physicians and their practices are not uncommon. Almost half (49.2%) of physicians age 55 and over have been sued, according to research by the AMA, and over a third of physicians (34%) have had a liability claim filed against them at some point in their careers. We show you how to protect assets from litigation as a physician.
Protecting Physician Assets, Saving on Taxes, and Creating an Estate-Plan
Many doctors assume that creating a corporation will protect their personal assets from creditors or judgements; however, that’s not a guarantee. Plaintiff’s attorneys can find ways to tap into those organizations to get at funds and assets of physicians. The asset protection laws vary by state.
Instead, doctors are much better off structuring their assets with other financial tools and vehicles that will not give them protection—and also provide for estate-planning.
There are three basic categories that can help give a physician and his practice a greater level of protection, along with tax benefits and estate planning. Let’s look at each of these:
401(k) and IRA retirement accounts can shield a physician’s assets from creditors and lawsuits, plus they have the added tax advantage accumulating wealth, as the funds in these accounts continue to grow. IRA assets can be exempt for up to $1 million depending on the state, while ERISA-qualified 401(k)s have limitless protection from claims.
As you may be aware, the IRS limits the amount of yearly contributions, and there is a 10% penalty for any withdrawals prior to age of 59½.
In addition to these two types of retirement accounts, physicians who own small business practices should consider how the state’s tax and probate regulations treat SEP (Simplified Employee Pension) IRAs. This is a traditional IRA for self-employed people or small business owners.
Trusts can also be leveraged to protect the assets of physicians.
An asset-protection trust is a way to shield funds from creditors, such as the satisfaction of a medical malpractice court judgment. Some states even permit out-of-state residents to open these trusts, which can be used for real estate, life insurance policies, cash, and securities investments. However, there are only about a dozen states that allow a person to establish such as asset protection trust without residing there. Talk with a legal professional about this.
Typically, a claimant can’t get to trust assets unless there is some type of fraud. Trusts can have complex regulatory requirements and should be drafted by a trust attorney.
Annuities and Life Insurance
These types of policies are a third way to protect a physician’s assets. However, it’s important to note that they must be purchased and documented well before a potential malpractice claim. That’s because there may be “claw back” provisions that allow a claimant to get at those funds within a certain period of time from the filing of a court action.
Fixed and variable annuities require a lump sum at the time of creation but provide a steady flow of income. Longevity annuities will begin these payments later in life to supplement long-term care if needed. Physicians should do their homework because each policy and provider have different terms and restrictions. There are also fees and triggers that can make annuities expensive. Plus, there aren’t exempt from income tax, so this discussion should be part of a physician’s complete financial, business succession, and estate planning strategy.
Perhaps you’re at the point of considering the sale of your medical practice. If so, you should prepare with a seasoned business advisor like Andrew Rogerson.
There Are Many Steps to Selling a Medical Practice
There are many steps to successfully sell a medical practice. Click here if you would like a one-page summary of the Many Steps to Sell a Medical Practice. Visit our website for information about the value of your medical practice or call Andrew Rogerson at (916) 570-2674.