Asset Protection 101
As a physician, you are most likely very aware that we live in a litigious society. In fact, asset protection is often the first topic that individuals in the medical profession address with their attorney and financial advisor. If you haven't incorporated asset protection planning as part of your financial plan, your assets may be vulnerable to potential future creditors. Lawsuits, accidents and other financial risks are facts of everyday life. What can you do? The first step is to identify your potential loss exposure, then implement strategies that are designed to help reduce that exposure without compromising your other estate and financial planning objectives.
Asset Protection Techniques
Asset protection techniques typically fall into one of three categories: insurance, statutory protection, and asset placement. None of these techniques is a complete solution by itself, but may make sense as a component of your asset protection plan.
Technique #1: Personal Liability Insurance
One of the most effective tools for asset protection is personal liability insurance, which generally offers relatively inexpensive protection against a range of personal lawsuits. First and foremost, you should review your coverage to determine whether it is adequate. Determining how much coverage is right for you is a personal decision that depends upon many factors including the value of the assets you would like to protect. Your financial advisor can work with you to guide you through this process.
Technique #2: Statutory Protection<
Creditors can't enforce a lien or judgment against property that is exempt under federal or state law. While exemption planning can't offer total protection, it can offer shelter for certain assets. For many individuals, the bulk of their net worth is comprised of a primary residence and retirement assets.
With regard to your primary residence, consider available homestead protection. When properly utilized, this may protect at least a portion of the equity in your principal residence from future creditors.
In addition to the homestead laws, married couples should consider owning their homes as tenants by the entirety. This form of ownership resembles joint tenancy but can provide additional benefits. Since each spouse effectively owns the entire asset, a creditor of one spouse cannot involuntarily seize the property. If properly established and maintained, the protection would generally fail only if both spouses are jointly liable, the couple divorces, or when a spouse passes away. This form of ownership is not available in every state.
For asset protection purposes, federal government regulations often treat savings in qualified employer-sponsored retirement plans differently than other assets. For example, assets within a 401(k) plan or defined benefit plan receive certain creditor protection benefits. It is important to note that although creditors cannot access money while it is within the plan, they have the ability to make a claim on any distribution that occurs.
Individual Retirement Accounts, or IRAs, are also afforded certain degrees of creditor protection. However, the rules are set at the state level rather than the federal level.
In addition to laws protecting an individual's primary residence and retirement assets, many states have laws protecting to some extent and under certain circumstances the cash value and/or proceeds of life insurance policies from creditors of the insured/owner.
Technique #3: Asset Placement
Asset placement refers to transferring legal ownership of assets to other individuals or entities. The basis for this technique is simple – future creditors can't reach property that you do not own or control.
One asset placement technique that is common among physicians, and other professions where liability exposure is high, is to transfer a portion of your assets to the non-physician spouse. The non-physician spouse would retain the assets that are subject to exposure as his/her separate property, and you would retain assets that enjoy statutory protection. Furthermore, the shifting of assets to a spouse may help accomplish other estate planning goals. As with any planning strategy, there are drawbacks to this technique. For example, this strategy may complicate matters should you and your spouse file for divorce or should he/she have his or her own troubles with creditors.
Another option which falls within the asset placement realm involves gifting assets to your children or other family members. Gifts may be made outright to the recipient or to an irrevocable trust for their benefit. Funds may also be gifted to a 529 Plan which, depending on state law, may provide certain protections from creditors. It is important to remember when gifting assets for creditor protection purposes or otherwise, the assets must be irrevocably surrendered and are no longer available for your use or enjoyment.
Proactive Planning is Key
Many planning strategies may effectively provide asset protection before a claim or liability arises. However, most techniques will not provide protection if they are instituted after the fact. If a court finds that your asset protection plans were made with the intent to hide assets or defraud creditors, it will disregard the plans and make the assets available to creditors.
This article has provided a high level overview of asset protection planning. As with any type of planning, it is imperative that you consult with your team of advisors, including your qualified attorney, CPA and financial advisor, to determine the most appropriate course of action given your individual circumstances and planning goals.
Note: The views expressed herein are those of the author and do not necessarily reflect the views of New England Securities, Corp and/or any of its affiliates. This document should not be construed as legal, tax, accounting or any other professional advice or service. This document is designed to provide introductory information only. No one should act upon the information contained herein without appropriate professional advice after a thorough examination of the facts of a particular situation. New England Securities, Corp. and Baystate Financial Services do not provide tax and legal advice. L0112200248[exp0114][MA]
Jennifer N. Shea serves as an Estate and Business Planning resource at Baystate Financial Services. In this role, Jennifer works with Financial Representatives to provide subject matter expertise to help identify and create customized solutions for clients. Jennifer is a Registered Representative of New England Securities, Corp. (Member FINRA & SIPC). New England Securities, Corp. and Baystate Financial Services are not affiliated entities. Jennifer can be reached at firstname.lastname@example.org.