|
Asset Protection for Physicians
Overview
Physicians consider themselves targets, and they are, but their biggest predators
are not personal injury lawyers. The average physician is
not likely to be successfully sued in excess of their reasonable medical malpractice
limits – such verdicts are actually very rare and nearly all could have
been settled within the limits of the physician’s coverage.
Where physicians are most likely to lose wealth is through bad marriages,
bad investments, bad tax planning, or a combination thereof. The average physician
usually can’t name a colleague who got cleaned out in a medical malpractice
lawsuit, but they can readily name a list of buddies who have lost money to
ex-spouses, in various investment schemes, or they got burned in a tax shelter.
Indeed, physicians are stalked by a variety of promoters hawking all sorts
of schemes, from tax shelters such as Irish/Barbados employee leasing schemes,
to screwy and hyper-risky investments, to cookie-cutter offshore asset protection
structures, and all sorts of other questionable schemes. Some groups even
exist to market just to physicians, and offer them a veritable buffet of canned
products and services that are advertised as meeting the specific needs of
physicians but are simply mediocre or questionable solutions that have been
repackaged with an MD logo.
Some of these groups adopt fancy names to try to sound respectable, such
as “American Foundation for Physician Justice and Asset Protection”,
and claim that they have been “endowed” by grants. Most of these
scams are run from the Salt Lake City area, and they work by holding seminars
enticing physicians to spend $2,000 or more on (worthless) kits that purport
to allow them to form family limited partnerships and various special trusts.
Usually, the seminars are loaded with paid shills who at the conclusion of
the seminar will stand up and rush to the back, so that purportedly they won’t
be the last and not get one of these kits, and thus trying to stampede the
rest of the crowd to do the same. After the seminar, the checks of the shills
are torn up of course, and the physician takes his kit home to self-create
a nightmare of tax consequences for himself.
How good are these kits? Let’s put it this way: If you bought a kit
with a laser pointer and a how-to videotape and a guide to performing laser
surgery on your own eye, would you start pointing the laser pointer into your
eye hoping that it would eliminate your need to wear glasses? That’s
about the level of sophistication that these kits offer, and the structures
they tell you to set up suffer from glaring defects, such as making the physician
the general partner of his own family limited partnership. These kits also
create tax nightmares.
This isn’t to say that physicians do not need asset protection, but
that the asset protection they are getting usually isn’t what they need.
But in attempting to satisfy those needs, a significant problem is that the
average physician simply doesn’t have enough wealth to make the best
planning cost-effective. The better solutions that are available to a small
business owner making $5 million or more per year and having a net worth of
$30 million or more, usually make no economic sense for a physician struggling
to net a million or two per year after taxes. Thus, physicians tend to end
up in one-size-fits-all legal or financial products than personalized planning
for their unique needs. While the use of some product solutions is necessary
to keep costs down, physicians still require a holistic and blended legal,
financial and tax plan.
Strategies to Avoid
Foreign Asset Protection Trust – Although offshore
trusts are mass-marketing to physicians as asset protection tools, they work
very poorly for physicians. The reason is that the Anderson and Lawrence decisions
have demonstrated that all a creditor needs to do is to ask the court to enter
a repatriation order (“bring all the assets back to the U.S.”)
against the settlor of an offshore trust, and if the settlor doesn’t
bring the assets back to the U.S., then the court simply throws the settlor
in jail until he does. This creates an important limitation on offshore trusts:
They work only if you are prepared to flee the United States.
The problem for physicians is, of course, that their practices are in the
U.S. and they probably couldn’t make anywhere near the revenue outside
the country that they do in it. Thus, although lots of physicians have been
sold offshore trusts, what happens in real life is that the physician doesn’t
want to either flee the country or spend time in jail, so that when litigation
arises they end up abandoning the offshore trust that they spent so much money
for. In other words, when push comes to shove the offshore trust is worthless
unless, again, you are willing to flee the country.
Before considering a Foreign Asset Protection Trust, better check out the
collection of cases at http://www.assetprotectionbook.com/fapt.htm
first. A physician who has a Foreign Asset Protection Trust might even consider
getting rid of it to avoid later possible problems.
Professional Leasing Companies – This is a tax scam
whereby the physicians fires himself from his own professional practice, and
then is re-hired by an employee leasing company situated usually in either
Ireland or Barbados. The physician’s practice pays large employee leasing
fees for the physician’s services to the Irish or Barbados company,
which then pays the physician a small salary and drops the rest into a non-qualified
deferred compensation account, known as a “Rabbi Trust”.
While all this sounds neat, the IRS considers it to be an abusive tax shelter,
and the U.S. Department of Justice has started prosecuting those who have
participated in these schemes. See http://www.quatloos.com/employee_leasing_shelters.htm
Basic Corporate Planning Strategies
Professional Corporation – A professional corporation
will not, by statute, shield the physician from professional negligence claims.
The professional corporation might, however, be useful in encapsulating within
it the liability from other claims, such as employment practices claims made
by staff, certain toxic materials claims, etc. Additionally, the use of a
professional corporation may later give tax planners some options if the practice
is later sold.
Equipment Leasing – Many physician practices require
expensive medical equipment, such as CT scan or laser-vision machines. If
these machines are owned by the practice, or worse by the physician individually,
any equity in them is exposed to creditors. Even worse, a valuable opportunity
is being missed to strip wealth from the practice by way of an equipment leasing
entity. Basically this arrangement involves a new limited partnership or LLC
that is set up for no other purpose than to hold the equipment used in the
practice. The existing equipment is then either sold or contributed to the
equipment leasing entity, which then leases it back to the practice. Every
dollar paid to the equipment leasing entity for use of the equipment is a
dollar that is removed from the potential reach of the practice’s creditors.
It is not just enough to set up a leasing company and call it a day. The
ownership of the leasing company must be structured so that the company cannot
be seized by creditors, or the creditors can convince a court that the arrangement
is a sham.
Property Leasing – Many physicians own the building
from where their practices do business. By separating the “dirt”
from the practice, a physician creates an additional avenue to strip money
from the practice and thus away from future unknown creditors. As with equipment
leasing companies, it is not enough to simply put the dirt into a different
entity. The entity must be structured so that a creditor cannot seize the
entity or convince a court that the leasing arrangement is a sham.
Integrated Estate Planning Strategies
BETIR Trust/Family Limited Partnership or LLC –
When properly done (which, by the way, is a rarity), a structure involving
a BETIR Trust and one or more Limited Partnerships or LLCs can provide substantial
asset protection for a portion of the physician’s assets.
As with Foreign Asset Protection Trusts, the problem with these structures
is that they are often sold as the only solution for the physician. While
these structures can solve some problems – and should be used for the
problems – they are unsuitable for solving many of the asset protection
issues face by physicians.
Premium Financing – Traditionally a method of purchasing
large amounts of life insurance, premium financing also can have the benefit
of encumbering real estate, stock accounts, and other valuable assets, thus
denying their benefit to creditors until the life insurance policy pays out.
Because most creditors will probably not want to wait possibly decades to
get at the assets, settlement is facilitated.
Insurance Strategies
Umbrella Insurance – Although umbrella insurance is
not meant to act as a substitute for the physician’s medical malpractice
insurance, umbrella insurance does play an important role in make the physician’s
other asset protection better insofar as it can often be taken into account
if a court attempts a “solvency analysis” to determine whether
a fraudulent transfer has occurred. Also, if litigation does arise, a plaintiff’s
attorney may well become fixated on hitting the umbrella insurance policy
chasing the limits of the umbrella insurance policy, to the exclusion of the
physician’s other personal assets.
Captive Insurance Company – Physicians always want
to know whether a captive insurance company makes sense for them, and it almost
never does. Typically, the insurance policies issued by a captive cannot be
used for hospital privileges, the formation costs and ongoing expenses are
too high, and frankly most physicians do not have enough wealth to capitalize
an insurance company and spread the risk against a run of bad luck in underwriting.
Cell-Captive a/k/a Rent-A-Captive – Physicians are
often scammed into participating into what is known as a “cell captive”
whereby they pay premiums to an insurance company that segregates their premiums
into a “cell”, and basically the only “reserves” they
have available to pay claims is whatever they have collected in their own
accounts. There are many problems with this, with the first problem being
that either the hospital where they need privileges either will not accept
the coverage or they are making misrepresentations to the hospital about the
true nature of their coverage. The second problem is that the physician is
taking a deduction for the premiums paid, but because there is no true risk
shifting or risk sharing such arrangements probably will not pass IRS scrutiny
if the arrangement is audited. Finally, a single claim can clean out their
account and leave them exposed again.
Group Captive – Sometimes a group of physicians can
group together to form a captive insurance company that they all own, and
which underwrites various risks of their practice. While this arrangement
makes tremendous sense, group captives for physicians are usually never successfully
put together. There are several reasons for this, primarily that each physician
is concerned that one or two significant claims by her colleagues will wipe
out the company’s reserves and leave her own policies issued by the
company worthless. Although these concerns can be mitigated in several ways,
such captives rarely get past the discussion stage.
Risk Retention Group – Despite the problems with captives,
there should be no doubts that risk retention groups (RRGs) make tremendous
sense for physicians. Basically, a RRG is an insurance company that is licensed
in one state (usually a state with “captive” legislation) and
then qualifies under the federal risk retention statute for treatment as an
RRG, meaning that it only has to notify other states that it is doing business
there without affirmatively obtaining the other state’s approval. RRGs
are regulated by the home state like any other insurance company, with the
limitations that the policies it underwrites must be homogenous, its policyholders
must by homogenous, the policyholders must own some portion of the company
just like a mutual insurance company, and the RRG does not underwrite life
insurance, workers compensation insurance, and several other types of policies.
The downsides to RRGs are that they usually have to have at least a few dozen
members before they even start to make economic sense, and they function best
when there are hundreds of members and can take advantage of the law of large
numbers in underwriting. With the crisis in medical malpractice insurance
that followed the investment markets decline of 2001-2002, new RRGs for physicians
blossomed like wildflowers after a summer rain, with nearly 30 new RRGs for
physicians being formed in 2003 alone. For the initial physician owners who
start the RRG, there are tremendous money-making opportunities in addition
to filling gaps in the availability of medical malpractice insurance. Another
advantage of RRGs is that they have more latitude to “cherry pick”
quality risks, i.e., not accept high-liability specialties like obstetrics.
Employee Benefit Strategies
Most physicians have IRAs and other pension plans, but depending on the states (or where they are sued) these plans may afford little or no protection against creditors – indeed, in some jurisdictions retirement plans are often attractive targets for creditors. From an asset protection perspective, a better type of planning involves certain advanced benefit plans, such as Section 419e Welfare Benefit Trusts or Section 412(i) Defined Benefit Plans.
The attractiveness of these plans is that since they are created for the benefit of the employees and not the owners, the assets in these plans should not be available to creditors of the business.
Because of these benefits, some form of ERISA planning usually makes sense for physicians, especially since they can simultaneously reduce their annual income tax paid since contributions to these plans are normally made pre-tax.
Collateralization Strategies
Accounts
Receivable Factoring – Typically, one
of the largest assets of the physician practice is also
the asset which is most exposed to creditors: the accounts
receivable. This is also a “non-working” asset,
i.e., the value of the accounts receivable is not earning
any investment income. By borrowing against the receivable,
also known as “factoring”, they physician can
effectively strip its value to creditors, while simultaneously
leveraging the asset for investment purposes. During the
last several years, major insurance companies and finance
companies have developed sophisticated programs to facilitate
the factoring of accounts receivables. These programs can
and should be enhanced to provide significant protection
for this valuable, and usually completed exposed, asset.
|
© 2007 by
Adkisson Publishing Inc. All rights reserved. No portion of this page or any portion of this website may be reprinted or otherwise duplicated without express written permission of
Adkisson Publishing LLP. Legal issues should be faxed to (877) 698-0678.