Why Asset Protection Matters for Doctors Especially
Just about everyone needs to put some thought into the matter of asset protection. But some groups of people have more to worry about than others. In particular, doctors are one of the most vulnerable groups, if not the most vulnerable to creditors and so it behooves doctors to give some extra thought to protecting their assets.
Medical malpractice law is a thriving industry in the United States. As a doctor, being sued is the rule rather than the exception: a study by the American Medical Association has found that 34% of doctors have had a lawsuit filed against them… but for older doctors nearing the end of their careers, the number is closer to 50%, which indicates that as a doctor, it is a coin flip as to whether you are going to be sued at some point in your career.(Doctors, by the way, includes dentists. Just because you work with teeth doesn’t mean that you are at less risk than any other medical professional, and dental malpractice lawsuits can be huge.)
It makes sense that medicine would be a hotbed of malpractice law. The stakes really don’t get any higher than when you’re dealing with the human body, and it doesn’t help that people who have concerns that their doctor was insufficient are frequently egged on by attorneys all too eager to profit off of medical malpractice lawsuits. As a doctor, this probably won’t come as much of a shock to you, and you probably already have some familiarity with the scope of the problem and the various asset protection steps you’ll need to take in order to protect yourself.
Even so, asset protection for doctors is more complicated than you may think. As a doctor, you probably don’t have a lot of free time to worry about financial matters, but medical malpractice attorneys devote all their time to finding ways to sue you. This means that it’s an unfair fight, and many doctors end up losing assets unnecessarily because they didn’t take the right steps to protect themselves. With a single lawsuit, you could lose everything that you spent years working for in college, medical school, and residency. And that is why you must make asset protection a matter of top priority in your life.
How a Medical Malpractice Lawsuit Works
To understand fully why medical malpractice lawsuits are so dangerous, it may be helpful to understand just how they work. You probably have some idea already, but if you’re a doctor, getting into the weeds of legal matters might not be right up your alley.
The lawyers for the other side don’t need to prove as much against you as you might think. All they need to do is prove that:
- There was a doctor-patient relationship between you and the patient.
- You made some lapse in judgment that a reasonable doctor would have avoided.
- This lapse caused some appreciable damages to the patient.
Malpractice may consist of several things, including failing to correctly diagnose an injury or illness, failing to treat the condition properly, or failing to fully inform the patient of the risks of a certain course of treatment.
Here’s what lawyers for the other side DON’T need to prove: they don’t need to prove that you wronged the patient intentionally, or even that you acted in a reckless or grossly negligent manner (although if they can prove this, they can get even more in damages from you). They simply need to prove that you made some mistake that a reasonable doctor would have avoided. Since even highly educated experts within a specific field may disagree with each other on various points, this means that expert witness testimony could easily be used against you.
Which Professions Are the Most Dangerous?
All doctors should be prepared for medical malpractice lawsuits, but some types of doctors have more to worry about than others.
According to the Medscape Malpractice Report for 2017, surgeons and OB/GYNs (or women’s health doctors more generally) are most likely to be sued: 85% of doctors in these fields had been sued for malpractice at some point. Other risky fields of specialty include otolaryngology (78%), urology (77%), orthopedics (76%), plastic surgery and aesthetic medicine (73%), radiology (70%), emergency medicine (65%), gastroenterology (62%), and anesthesiology (61%).
Specialist are more likely on the whole to be named in a malpractice lawsuit than primary care physicians, and male doctors are significantly more likely to be sued than female doctors (although the reasons for this are not entirely clear).
While all doctors should make preparations, if you find yourself in one of these fields, you should go the extra mile in taking steps to protect your assets.
Asset Protection Steps for Doctors to Take
Step 1: Ensure That Your Malpractice Insurance Is up to Date
As a doctor, you’ve probably already given some thought to the issue of malpractice insurance.
Some doctors chose to “go bare” and not buy any malpractice coverage. California and many other states do not require all doctors to buy insurance, and so you may be tempted to avoid it in order to skip the expensive premiums.
This is a mistake. Whatever the cost of medical malpractice insurance, the cost of paying for a legal settlement out of pocket (which is what you will have to do if you are sued and you have no coverage) will be far worse. Insurance provided by your employer will typically not be enough, and these policies will not follow you if you change jobs. If insurance premiums are high, this is a sign that you need malpractice insurance more than ever, because it is highest in situations where a lawsuit is most likely.
Don’t think being wealthy will protect you, either: if you have enough money that you may be able to pay a malpractice settlement out of pocket, this will just make you a target for bigger malpractice lawsuits.
Some doctors think that because California (and several other states) have passed tort reform, this will decrease the impact of a lawsuit. However, California has only capped noneconomic damages. Economic damages can range into the millions of dollars still. On the other hand, tort reform has made insurance premiums somewhat lower. Medical malpractice premiums have declined since reaching a peak in the late 90s, so they may be more affordable than you think.
Medical malpractice insurance can be divided into occurrence-based and claims-based coverage. Both types of insurance only cover incidents that occur during the time you are covered by the policy; the difference is that occurrence-based coverage covers claims that are filed after the duration of the policy, while claims-based coverage does not (although you may be able to purchase tail insurance on your claims-based policy that will cover such claims). Occurrence-based coverage is preferable, but costs more, and if you cannot afford it, it is still better to have claims-based coverage than nothing.
Finally, it is important to keep your insurance policies up to date with inflation. The size of settlements and judgments in malpractice law will keep pace with inflation, but insurance stays at the same level at which you purchased it, unless you update it. If you bought your insurance several decades ago, then you may want to increase your coverage.
Step 2: Place Your Assets in an Asset Protection Trust
You may already have created a trust for estate planning purposes. This trust will not necessarily protect your assets… but with a little work on your part, you can create a trust that will.
Asset protection trusts, which are a type of self-settled trust in which you are a beneficiary as well as the settlor, can be set up either in the United States or abroad. If you wish to set up a domestic asset protection trust, there are a number of states (including Nevada) that allow you to do so, even from out of state.
If you want to go all the way and move your assets offshore, then there are several countries where you can do this. The Cook Islands is the first and foremost (note to Keith: link Cook Islands article) These nations have laws that protect foreign investors, and such trusts are perfectly legal under United States law so long as all appropriate taxes are paid.
One excellent structure can be where the asset protection trust owns an LLC of which either you or a family member or a close friend are the manager. The LLC would then carry on business somewhat independent of the trust so that the trust company serving as the trustee does not charge as much money and get involved in the business affairs unless there is an absolute need which would come about in the event of a claim against the LLC. We refer to this as the Modular Structure with the asset protection trust owning an LLC which is funded with property or investments. There can be several LLCs, in fact. Where you have an offshore structure you can have an offshore LLC as the holding company for the domestic LLCs.
We’ve helped a lot of people in different professions move their assets offshore, but we recommend it for medical professionals above anyone else. A great many doctors have already invested in Cook Islands trusts, rightly recognizing the unique risk their assets face, and you would do well to consider joining them.
Be warned, though: if you have created an ordinary living trust, then this won’t do anything to protect your assets. That is because living trusts are revocable: you can take money out and put money in at will, without needing to obtain the permission of the trustee, and as a result, the assets are considered to be in your possession. You’ll need to actually make a special asset protection trust to receive any benefits in that regard.
Step 3: Retitle Your Assets
If you are married, and your spouse is not a doctor, then one very simple but effective way to protect your assets may be to retitle them in your spouse’s name.
Here’s how it works: California (like a number of other states) is a community property state, which means that any money earned by either partner during a marriage is considered the common property of both partners. Such property will generally be equally divided during a divorce, even if one partner has earned more of it.
However, you can transfer the title of the property to your spouse during the course of your marriage. At this point, it will become your spouse’s personal property, and anyone who sues you (as opposed to your spouse) will not be able to recover it. It makes a lot of sense for the partner who is at higher risk of a lawsuit in a marriage (that’s you if you’re a doctor, unless your spouse is also a doctor in an even riskier field) to give their assets to the partner less at risk.
Anyone who has a claim against one spouse can go against the community or joint property of both spouses to satisfy the claim. However, you can transfer the title of your interest in the property to your spouse during the course of your marriage. If you do transmute your community or joint property interest to your spouse as separate property, the strategy will stand up much better if there is a quid pro quo or fair market exchange. For example, a physician may transfer a community or jointly held property interest in a personal residence to a spouse in exchange for the spouse’s interest in a medical practice. The interests have to be equal in value.
Although this strategy is very simple, a lot hinges on the stability of your marriage. If you and your spouse divorce, then community property will be divided equally but each partner will be allowed to keep all of their personal property – which means your spouse will get to keep 100% of everything you’ve given to them. So if you have any reason to believe that you and your spouse may divorce at any point in the future, this is something you should be careful of doing. This strategy also necessarily involves some risk by opening up your assets to your spouse’s creditors.
Finally, you must only do this at a time when you are not actively being sued and have no reason to anticipate an imminent lawsuit. If you transfer your assets to your spouse specifically to evade payment to a particular creditor, then you will be guilty of fraudulent transfer.
Aside from transferring assets to your spouse, you may transfer them to another family member or trusted individual. Here, too, you will have to be careful of engaging in fraudulent transfer: preparations must be made well before any actual lawsuits materialize.
Step 4: Place Your Assets in a Retirement Account
Many types of retirement accounts, including pension plans, 401(k)s and IRAs, can protect your assets if structured properly. These are often easier to set up than a trust, although they have the major disadvantage that you will not be able to withdraw money from these accounts before retirement without facing a penalty. As a result, this strategy may be most fruitful for the purposes of asset protection if you are more advanced in your career and approaching the age of retirement.
The precise asset protection benefits that you will receive vary depending on what type of retirement account you use. With regards to 401(k) plans and other plans established by employers, you will be protected if the plan was set up under the Employee Retirement Income Security Act of 1974 (ERISA). IRAs are also protected under federal bankruptcy law, although this protection is not absolute. However, if you are the owner of the employer entity and the only beneficiary of the plan, the courts have refused to honor the exemption.
In addition to federal law, protections on the state level differ: California does not offer protection against creditors for money in IRAs, but some other states do.
Step 5: Hedge Your Bets
Although the abovementioned strategies are some of the most straightforward methods for asset protection, the process of protecting your assets is inherently complex and requires you to be creative. Remember, as a doctor, you have a target on your back, and will need to stay far ahead of your potential creditors.
But while asset protection is crucial, relying too much one a single strategy will defeat the purpose. To effectively achieve the goals of asset protection, you must therefore develop an integrated plan that takes into account your specific circumstances and a variety of other factors. This means hedging your bets and not relying too much on any one asset protection strategy.