Some weeks ago, a reader requested a post on the issue of personal asset protection. This great idea took time, mostly because I had so much to learn myself.
While I may have an advanced degree, it most certainly is not a JD! Need I even mention that none of what I have to say should be construed as “legal advice?”
Many thanks therefore go to David Woodburn, JD, leader of the Trust and Estates Practice Group at Buckingham, Doolittle, and Burroughs, in northeast Ohio, for sharing his time and expertise.
What is personal asset protection and why do I need it?
I'm sure that the reader I mentioned came to me with this idea simply because nothing strikes greater fear into many physicians' hearts than the thought of a malpractice suit resulting in a jury award greater than what the malpractice insurance policy will cover.
Stories abound regarding awards of $1.5 million and more, and yet, our policy limits generally provide for $1 million in coverage per occurrence, $3 million in aggregate. Consequently, physicians may worry that plaintiff's lawyers will come after their personal assets in an attempt to cover the difference.
Interestingly, however, malpractice litigation is not the most pressing reason for a physician, a nurse, or any other healer to take a look at how they protect themselves from a claim against their savings and other assets.
Dirk Riemenschneider, a lawyer practicing exclusively in medical malpractice defense, tells me that although it has been known to happen, in 27 years of practice, he has never personally seen a physician lose their personal assets in a malpractice claim. I would think of it like a cervical spine injury. High risk but low likelihood.
According to Woodburn, what is actually much more likely is a loss of personal assets to creditors on account of a disability or to bankruptcy related to extremely high healthcare costs for a member of the family. Also more likely is a lawsuit related to the activities we engage in every day – owning a home, driving a car, having a pool, or running a business.
We healers work hard to learn our skills and make our living. It's therefore worth giving some thought in advance to what we have and the best ways to protect it. As a friend of mine put it, lawyers generally will not pursue what they cannot successfully get.
Here and Now
When should you address asset protection? For most of us – including resident physicians -- the best time is now! Asset protection is like a seatbelt. It only works if you have it on before you actually need it!
The exception arises if there is already a legal claim against you, or an event has occurred leading you to believe that a claim may be filed in the near future. In the midst of a crisis, efforts to re-title assets or establish a trust to protect them will constitute "fraud with a capital F."
If you find yourself anxious to protect your assets because a crisis has erupted or may be about to do so, then you need Plan B.
Take no hasty action. Speak openly with your lawyer regarding your fears. A smart attorney will take this issue into careful consideration as they guide you concerning what would be lawful and ethical, whether to seek additional counsel, whether to pursue a settlement or go to trial, and potentially myriad other legal subtleties.
Fraudulent actions on your part will make honest lawyers angry as fast as lying patients infuriate us. These actions tie your lawyers' hands and will stack the deck against you, potentially doing you infinitely greater harm in the long run.
In short, if you are reading this because you are in the midst of malpractice litigation and worried about what that might mean for your assets, talk with your defense lawyer and sit tight.
What Sort of Assets Are We Talking About?
According to Ike Devji, JD, interviewed on the Doctor Money Matters podcast, it makes sense to start by making a crucial distinction between personal and business assets. A clear line is essential for those who own a business, be that a private practice or lab, rental real estate, or any other income-earning entity.
Segregation of your assets in this manner is not only legal and ethical, it is smart. Ideally, you want to protect personal assets from a lawsuit filed by an employee or renter, say, and business assets from a lawsuit filed when the new driver in your family gets into a car accident.
Devji indicates that the risks of owning a business are not covered in any way by your malpractice insurance. He states that you are in fact more likely to be sued by an employee than for any other reason, including an allegation of malpractice, and recommends that you protect yourself with:
- A custom-drafted, state-law-specific employment manual:
- EPLI – Employment practices liability insurance, which he also dubs employee lawsuit insurance; and
- Data breach/cyber-liability insurance, which comes at a low cost when compared with the risk of HIPAA-related fines and such.
Beyond that, the protection of business assets is outside the scope of this post, other than to say, “Get thee to a business lawyer!” if that concern applies to you.
The Role of Insurance
Having the right kinds of insurance in the right amounts is a huge step toward protecting hard-won personal assets from creditors. Let's not even touch health insurance. I presume you have it. Otherwise, here are the essentials:
Auto – Required by law in most states, your auto policy provides coverage of property but more importantly, protects assets against claims around health expenses for the injured. And we both know how healthcare costs go in this country. Of course, the most important way you protect your assets behind the wheel is to drive defensively.
Homeowner's – Covers property damage or injury to a guest on your property. Bear in mind that you further protect your financial assets by “home-owning” defensively, too. Properly enclose your pool and perhaps contemplate whether the benefits of a trampoline on your property outweigh the risks.
Umbrella liability – An umbrella policy gives you extra coverage for all sorts of personal purposes. It will not fill the gap when the claim relates to your work, but it will help enormously if your teen driver hits a $150,000 Porsche or worse yet, you or someone you love hits a pedestrian. In those instances, a claim against you may easily exceed the limits of your auto policy. A policy providing $1 million in coverage is often quite inexpensive. If money is tight, you might ask your insurance agent whether raising the deductibles on your auto or homeowner policies wouldn't free up the money for an umbrella premium. Depending on numerous variables, this policy may cost you $30/month at most! Mine is closer to $10.
Disability – We physicians are a little prone to think we are invincible. We are not. Get your disability insurance with a sturdy “own-occupation” clause while you are young, often as you finish training. It will be pricier than life insurance because you are much more likely to be disabled than to die at an early age. It's worth the cost because you are much more likely to be disabled than to die at an early age. Got it?
Life – If there is anyone other than you who depends upon your income, you need life insurance. Term insurance which accrues no cash value is most affordable, and ideal for the average young person with a spouse or baby. While you're at it, if you have a child, make sure you have a will in place which names a guardian.
Assets Protected by Law
Woodburn notes that certain personal assets are protected by law, even in the exceedingly rare event that an award related to malpractice litigation exceeds your policy limits:
Your Home – Homestead exemptions provide at least partial protection of your primary home. In some states, the total value of your home equity is protected; in others, there is a cap. In Ohio, for instance, the first $133,000 (indexed for inflation) is protected.
Retirement and Health Savings Accounts – Yet another reason to plow assets into retirement accounts and HSAs early and often! In most if not all US jurisdictions, accounts governed by ERISA (Employee Retirement Income Security Act) are heavily protected. No creditor or litigious citizen can take them away from you. These include 401(k) and 403(b) plans as well as some others. Protections for non-ERISA plans such as Individual IRAs and others vary by state. Some protect them entirely, others with a cap. A visit to the website of your state's Bar Association may illuminate the matter. If not, a little local legal counsel will do it.
529 accounts, UTMAs, and the like – Accounts in which the funds are irrevocably set aside for your child are protected from any and all claims against you.
Other assets you may need to further protect
When and if you will need to pursue further asset protection measures is highly individual, depending on wide-ranging factors, including:
your age when you graduate from medical school;
the amount of student debt you carry (I've been there!);
the specialty you enter;
the cost of living where you reside;
the number of people dependent upon your income and their health or other needs;
whether you have a partner with income;
the ratio of saving-to-spending which you embrace.
If you begin to accumulate significant assets beyond those mentioned above, they will be vulnerable to a claim against you unless you take steps to protect them. How best to do that is highly dependent upon the nature of the asset (cash, real estate, etc) and the laws of the state in which you live.
While it may be tempting to simply title assets in the name of a spouse with a lower risk occupation, Woodburn points out that this may not provide the protection you seek, given that a claim against your spouse related to a car accident may be no less likely than one against you, and both are far more likely than a claim against your personal assets related to a malpractice lawsuit. Not to mention that the umbrella liability policy you rushed to purchase may cover you there!
Those whose personal assets (excluding retirement accounts, 529 college saving accounts, and homestead exemption) exceed $100,000 are wise to seek legal counsel. Domestic Asset Protection Trusts or other irrevocable trusts can protect large sums, but are costly to create. They therefore may only make sense for those with very high levels of unprotected personal assets. If you find yourself in that category, an excellent lawyer specialized in asset protection and trusts in your state will guide you best.
Thanks to the reader who suggested this topic! I invite all of you to use this form to send me your ideas for future posts.