Don’t let a lawsuit undo decades of hard work. Here’s how to keep your wealth safe!

According to the American Medical Association, approximately one-third of all physicians will face a malpractice lawsuit, and just under 2 percent of physicians will face a lawsuit each year. While the volume of lawsuits seems high, roughly half of these lawsuits are considered frivolous. These statistics should prompt any physician to add asset protection measures to their financial plan. A lawsuit could be devastating after years of building wealth.

Common asset protection misconceptions

Moonlighting income

A frequent misconception in asset protection is that malpractice insurance as a hospital employee protects your personal life. If you’re employed by a hospital and you happen to be dragged into a lawsuit, there’s a chance your personal assets aren’t in consideration for loss due to the hospital providing the medical care. On the other hand, if you’re moonlighting or you own the medical clinic, and your insurance policies aren’t set up correctly, your personal finances are likely at stake in a big way.

When starting a private practice, many physicians turn to moonlighting while getting their own clinics off the ground, and some employed physicians pick up extra shifts to help colleagues or increase their income. Moonlighting provides many benefits, such as additional income sources, expanding a network, and sometimes even accessing certain benefits. While moonlighting can be beneficial, it’s important to understand who is providing the care.

If you’re moonlighting at a clinic or hospital that has no connection to your place of employment, then you are providing the care. This means you are the institution delivering medical advice. If there was a lawsuit, your personal assets could be up for grabs. If you’re moonlighting at a clinic or hospital that’s run by your employer, it’s much more difficult to decipher who is providing the care. If your moonlighting income is included in your W-2 with taxes withheld, then the hospital system is likely providing the care. If there are no taxes being withheld from your moonlighting earnings, then you are likely being paid as a 1099 contractor, which means you are likely the institution, and your personal assets may be at risk.

Trusts

Another misconception is that basic estate planning trusts provide a layer of asset protection. Basic estate planning trusts include living trusts, family trusts, and revocable trusts. While these trusts are vital to your financial plan, they don’t provide much benefit for protecting assets. These trusts don’t remove assets from your ownership and control; instead, these trusts organize and efficiently hold assets for the trusts’ beneficiaries. The owner, creator, and beneficiary of these trusts are the same person, so there are no asset protection boundaries established.

The best way to utilize a trust for asset protection is to name your trust for the purpose of anonymity. For example, Dr. John and Dr. Jane Doe may opt to name their trust “The JDJD Trust” instead of “The John and Jane Doe Trust.” While this doesn’t protect against creditors directly, it does provide a layer of mystery, so assets held in the trust are more difficult to discover.

How to protect assets

When you’re establishing some asset protection layers in your financial plan, there are two distinct segments of asset protection: corporate and personal assets. The corporate asset protection measures will be established to protect assets if there is a lawsuit stemming from work at the hospital. Personal asset protection measures will be established to protect assets from all personal matters, such as disputes, accidents, and personal lawsuits. There are some asset protection tactics that protect against both corporate and personal lawsuits, and there are some that only protect against one layer. Let’s explore some of the most common methods of asset protection for physicians.

Malpractice insurance

If you’re an employed physician and you work for a hospital system or an established clinic, there’s a good chance this is all covered for you. If you moonlight, own your own practice, or work multiple jobs, you’ll want to make sure you have a decent understanding of your policy.

There are two kinds of malpractice insurance policies: claims-made and occurrence. The insurance industry didn’t do a good job in effectively describing these policies, so I always remember that “two words are better than one” for these insurance policies (“claims-made” is two words and is the better policy). A claims-made policy is an all-encompassing policy. If there’s a claim during the policy period, current or past, then the policy may be available to pay a claim, even after the policy period has ended.

An occurrence policy, on the other hand, is only available to pay claims while the policy is in force, so if there’s a situation that arises after the policy is no longer active, an additional insurance policy called a “tail policy” is needed to extend the coverage of the occurrence malpractice insurance policy. Having a grasp on which shifts, jobs, and moonlighting gigs are covered by which malpractice insurance policy is vital. If there’s a gap in coverage or if there’s a job that has no malpractice insurance available, an independent policy may be necessary.

Umbrella insurance

Purchasing an umbrella insurance policy is one of the cheapest (unless you have teenage drivers!), easiest, and quickest ways to obtain a basic layer of personal asset protection. An umbrella policy is attached to your car insurance policy, and it is an insurance policy that extends the liability protection of your auto homeowners insurance policies to cover a wide range of personal liabilities and lawsuits. The perception is that umbrella policies protect against car accident lawsuits only, but that’s not the case. They protect against all sorts of personal lawsuits, and many policies have evolved to help with identity theft, financial harm caused by slander, legal fees and court costs, and some medical expenses other insurance policies may not cover during accidents.

Umbrella insurance policies are generally offered in benefits ranging from $1,000,000 to $5,000,000. More insurance can be obtained, but additional underwriting – or proof that the insurance amounts are justified – is needed. To put the cost in perspective, $1,000,000 of umbrella insurance typically costs about $20 per month (insurance companies have varying rates). The biggest hurdle in purchasing an umbrella insurance policy is getting your current car insurance limits set to appropriate amounts so an umbrella insurance policy can be offered.

For a physician, an umbrella insurance policy makes perfect sense to purchase. An esteemed, high-income earner could more frequently be the target of a lawsuit – frivolous or not. Umbrella insurance is almost always the first layer of asset protection in a financial plan.

LLCs and PLLCs

An asset protection component that uniquely touches both personal and corporate asset protection is an LLC (or PLLC). An LLC is a Limited Liability Corporation (a PLLC is a Professional Limited Liability Corporation), which is usually an inexpensive corporation to start and manage. LLCs are “pass-through” entities for tax purposes, meaning they don’t have to file their own tax returns, so if your LLC generates income, that income is filed on your personal tax return.

Establishing an LLC makes sense when you have or plan to have certain assets that warrant an LLC. Those assets include business interests, real estate, and private equity investments. The LLC provides a layer of liability protection (hence the name “Limited Liability Corporation”), so if you’re moonlighting and you have an LLC established to collect the moonlighting income, the LLC (this would technically be a PLLC since this is physician-related company/asset) would be the entity providing the care, not you. The LLC builds a sort of legal wall between your personal life and your professional life as long as the LLC is treated like a separate business. If the LLC is just an extension of your personal life with funds commingled with your personal accounts, then the liability protection measures may not hold up.

Creditor-protected assets

Each state treats assets differently for lawsuit protection. Understanding how your state views your assets from a liability standpoint can help you fit creditor protection into your financial plan. In every state, employer-sponsored retirement plans, such as 401(k)s and 403(b)s, are protected from creditors. Most states have a homestead exemption as well, which protects your personal residence from creditors, but some states have limits on the value of the residence that’s protected, while other states have no such limit. Many states have some kind of asset protection for IRAs, and this varies by state. If asset protection is at the top of your to-do list, prioritizing assets that are protected in your state is fairly simple.

Asset protection trusts

If asset protection is a serious subject, and you feel the previous asset protection measures aren’t sufficient, an asset protection trust may be a consideration. Asset protection trusts are generally intrusive, and they provide a basic safety net of income by removing assets from your control in case of a legal judgment. Asset protection trusts are irrevocable trusts that are funded with assets that aren’t needed (ever) for the remainder of your life, so you remove these assets from your control through the asset protection trust. If you’re sued and lose significant assets and income sources, these trusts may be triggered to provide you income. The tradeoff is that if you’re not sued, you may not be allowed to utilize these trust assets for the rest of your life. The assets will likely pass to a beneficiary at your passing.

These assets aren’t included in lawsuits because the assets in the asset protection trusts are no longer yours. You gave up control over the assets when you transferred the assets to the irrevocable trust. These trusts are generally an extreme step in providing an asset protection plan.

Be proactive

Each of these can protect your hard-earned assets from creditors, but only if the strategies are implemented before they’re necessary. If you happen to find yourself in an active lawsuit without these tasks already completed, you can’t go back in time and choose an asset protection strategy to help. Asset protection is a task that needs to be proactively executed well before it’s needed. In most financial plans for physicians, asset protection is one of the first and most effective items on the planning agenda.

Paul Morton is a certified financial planner.