Looking for Asset Protection that Works? Your Best Tools Are Often Something Else

David B. Mandell, JD, MBA

Jason M. O’Dell, MS, CWM

Over the last decade, too many physicians have sought so called “asset protection plans” to give them some peace of mind that if they ever endure a malpractice case, they won’t lose everything.  While we admire these doctors’ commitment to proactively managing risk, we must remind them that all “asset protection plans” are not created equal.

Why is this?  Essentially, it is because of a basic tenet of asset protection: that any asset protection plan that will truly stand up if challenged must have economic substance. Taken a step further, superior asset protection planning involves tools that are primarily used by people for non-asset protection purposes.  In this way, the best asset protection plan involves tools typically not thought of as asset protection tools.  In other words, the best asset protection is not asset protection.

  • Just Like Tax Planning

While few physicians realize this crucial fact of asset protection planning, all of the leading attorneys in the field know it quite well. In fact, we are not alone – as tax attorneys and CPAs know this adage is equally true when it comes to tax planning.

Simply put, when determining whether or not a particular transaction with significant tax benefits was an illegitimate tax shelter or not, the IRS or tax court typically uses a simple test – Would a taxpayer have done this deal if not for the tax benefit?  In other words, they are asking whether or not this transaction was simply done to save taxes or did it have another economic purpose?  If there was such a purpose, the transaction stands; if it was only tax-motivated, it fails.

This same test applies when evaluating whether or not a creditor protection tactic will be upheld if challenged down the road.  Here, the question is did this transaction have an economic purpose, or was it simply done for asset protection purposes? If you are using tools that millions of Americans use daily for non-asset protection purposes, you can convincingly answer yes.

  • Asset Protection as a Sliding Scale

In the eleven books either of us have written for doctors, including For Doctors Only, we use a sliding scale approach to evaluate asset protection techniques – with the lowest (-5) being an asset that is completely vulnerable and the highest (+5) being an asset that cannot be taken by a creditor even in bankruptcy.  This is important to understand here because every (+5) asset protection technique, whether in a personal or medical practice implementation, has significant economic benefits to the client, irrespective of asset protection.

  • Asset Protection which Isn’t

Which asset protection tools are not asset protection tools? Let’s examine a few of them briefly:

A. Qualified Retirement Plans:  The term qualified retirement plan means that the retirement plan complies with certain Department of Labor and Internal Revenue Service rules.  You might know such plans by their specific type, including pension plans, profit sharing plans, money purchase plans, 401(k)s, or 403(b)s.  Properly structured plans offer a variety of real economic benefits: you can fully deduct contributions to these plans and funds within them grow tax-deferred.  In fact, this is likely why most medical practices sponsor such a plan.

What you may not know is that under federal bankruptcy law, and nearly every state law, these plans are protected against lawsuits and creditor claims – enjoying (+5) protection status. IRAs are also (+5) protected in bankruptcy, with some limits, although their state protection depends on the state. For both, the overwhelming majority of millions of Americans who use qualified plans and IRAs are not using them for asset protection purposes.  This, then, is a great example of attractive economic tools that just so happen to have tremendous asset protection benefits as well.

B. Non-Qualified Plans: Benefit plans that are not qualified are relatively unknown to physicians, despite the fact that they are right in the tax code and can be categorized as non-qualified plans.  These types of plans should be very attractive to physicians, as they can be terrific hedges against future tax increases and they can be used in addition to qualified plans.  Once again, non-qualified plans are generally not used for asset protection purposes, but they may have such benefits – depending on how they are structured.

C. Captive Insurance Companies (CICs):  CICs are used by many of the Fortune 1000 companies, for a host of strategic reasons.  In a medical practice setting, the owners actually create their own properly-licensed insurance company – to insure various types of risks of the practice.  These can be economic risk (that reimbursements drop), business risks (that electronic medical records are destroyed), litigation risks and even medical malpractice (keeping some risk in the captive and reinsuring the rest).  If it is created and maintained properly, the CIC is like any insurance company — established in a real economic arrangement with its insureds.  Also, CICs can enjoy tremendous creditor protection (+4/+5) if the ownership is structured properly.

D. Cash Value Life Insurance (CVLI):  CVLI policies are purchased by millions of Americans each year for their tax benefits (generally, tax-free growth, can be accessed tax-free and pays income tax free to heirs), for family protection and for estate planning purposes.  Nonetheless, in many states, the cash value can enjoy the top (+5) protections.  In this way, a physician can purchase a product that is widely recognized as a part of a financial plan and enjoy (+5) protections easily.

  • Legal Tools

As you may have realized, three out of the four best asset protection tools above do not involve attorneys – and we point this out even though David is an attorney and has helped physicians in this field for 20 years. The simple truth is that the attorneys – regardless of their expertise – cannot create structures that are protected as well as asset classes that are exempt from creditors – what are considered (+5) on the scale referred to above.

Nonetheless, legal tools do play a role in a typical physician’s asset protection planning. Such tools can include family limited partnerships (FLPs), limited liability companies (LLCs), and certain types of irrevocable trusts, including what are called domestic asset protection trusts (DAPTs) in about ten states, and even international planning, in limited circumstances.

However, physicians should typically try to exhaust the (+5) options available to them, within the parameters of their overall wealth plan, before investing too heavily in these tools – although, clearly, some states are quite poor in their (+5) exemptions compared to others. Also, the same limitations described above apply – specifically, such legal structures are most protective when they have non-protection purposes and uses and, of course, are established well in advance of any potential claim.

Conclusion

Many physicians who have implemented generic asset protection plans may be disappointed if they are ever attacked – especially if they lack any economic substance or non-protective uses.  On the other hand, those who implement techniques such as those described above may be pleased – not only will their protection be upheld, but they may build significant wealth along the way. The authors welcome your questions.

SPECIAL OFFERS:  To receive a free hardcopy of For Doctors Only: A Guide to Working Less & Building More, please call 877-656-4362. Visit www.ojmbookstore.com and enter promotional code MMPS04 for a free ebook download of For Doctors Only or the shorter For Doctors Only Highlights for your Kindle or iPad.

David B. Mandell, JD, MBA, is an attorney at the Law Offices of David B. Mandell, PC and author of five national books for doctors, including, For Doctors Only: A Guide to Working Less & Building More, as well a number of state and specialty books. He is also a principal of the financial consulting firm OJM Group www.ojmgroup.com along with Jason M. O’Dell, MS, CWM, who is also a principal and author. They can be reached at 877-656-4362 or mandell@ojmgroup.com

Disclosure:

OJM Group, LLC. (“OJM”) is an SEC registered investment adviser with its principal place of business in the State of Ohio.  OJM and its representatives are in compliance with the current notice filing and registration requirements imposed upon registered investment advisers by those states in which OJM maintains clients.  OJM may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements.  For information pertaining to the registration status of OJM, please contact OJM or refer to the Investment Adviser Public Disclosure web site www.adviserinfo.sec.gov.

For additional information about OJM, including fees and services, send for our disclosure brochure as set forth on Form ADV using the contact information herein.  Please read the disclosure statement carefully before you invest or send money.

This article contains general information that is not suitable for everyone.  The information contained herein should not be construed as personalized legal or tax advice.   There is no guarantee that the views and opinions expressed in this article will be appropriate for your particular circumstances.  Tax law changes frequently, accordingly information presented herein is subject to change without notice.  You should seek professional tax and legal advice before implementing any strategy discussed herein.

About The Author

David B. Mandell, JD, MBA is an attorney in The Law Office of David B. Mandell, PC, author and speaker for Guardian Publishing, LLC and principal of the nationally-known financial consulting firm OJM Group, LLC.

As an author, Mr. Mandell has written ten books specifically for doctors. These include For Doctors Only: A Guide to Working Less and Building More, as well as state-specific versions of the book for physicians in California, Georgia, New York and Ohio. He has also co-authored an orthopaedic-specific text entitled Wealth Protection Planning for Orthopaedic Surgeons and Sports Medicine Specialists and the dermatology-specific book Wealth Protection Planning for Dermatologists – both co-authored with well-known physicians in these fields. Finally, he has co-authored the Category I CME Monograph Risk Management for the Practicing Physician which has gone through 6 editions since 1998.

His expertise from these books has allowed him to write articles in over 100 publications, including The American Medical News, Physicians Money Digest, and over 30 medical specialty journals. He has also appeared as an authority on television, including Fox and Bloomberg TV.

Mr. Mandell has addressed many of the nation’s leading medical conferences, including annual meetings of the American Academy of Ophthalmology, the American Section of the International College of Surgeons, the American Association of Neurological Surgeons, the American Academy of Dermatology, the American Society of Plastic Surgeons, the American Society of Aesthetic Plastic Surgeons, the American Association of Orthopaedic Executives and numerous others.

Mr. Mandell holds a bachelor’s degree from Harvard University, from which he graduated with honors. His law degree is from the UCLA School of Law, where he was awarded the American Jurisprudence Award for achievement in legal ethics. Mr. Mandell also earned an MBA from UCLA’s Anderson School of Management. He is a member of the California and New York bars. He can be reached at 877-656-4362 and Mandell@ojmgroup.com.

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