With Asset Protection, Compliance Is Key

Physician's Money Digest, January31 2004, Volume 11, Issue 2

Most physicians use a combination of strategiesin their asset protection plan. Each has formalitiesthat must be met. The following is a briefdescription of their basic legal requirements:

• Limited partnerships (LPs) and limited liability companies(LLCs). These are legal entities authorized by thestate or foreign government in which they are formed.Each state has particular requirements regarding themaintenance of legal entities. Typically, there are filingsand fees that need to be handled on an annual basis. Justas important are the compliance with entity formalities,including preparation of annual minutes, unanimousconsents, and resolutions.

In addition, these entities must not be used to comminglefunds and must comply with all tax formalities.If you have such entities in place in your asset protectionplan, make sure that you comply with these formalitiesor you threaten any asset protection benefitsyou may receive from the tools.

• Irrevocable trusts. Irrevocable trusts, because theyare funded with gifts for tax purposes, have a number oflevels of formality. First, gifts to the trust must complywith all IRS rules on the subject. Overseeing this can bequite arduous for trustees, unless they are corporate orprofessional trustees well versed in such formalities.

• Debt shields. The debt shield structure is ideal forprotecting real estate equity. Here, the formalities to becomplied with regard the proper documentation on theloan and proper filing of the security arrangement. Also,real dollars should flow to the lender, even if they are afriendly lender. Further formalities will depend on theexact nature of the debt shield structure.

• State exemptions. Each state has laws exemptingcertain assets from the claims of creditors. However,many states employ peculiar exacting rules on whichassets enjoy the protection and which do not. Further,for certain state exemptions, like homestead, there maybe a filing or ownership formality required before thehomestead protection applies.

• Annual checkups. Doctors should have their assetprotection plan audited on an annual basis for compliance.Typically, asset protection advisors charge between$100 and $1000 per year to perform a checkup.This might include preparation of various corporatedocuments for LPs and LLCs, review of accounts ownedby such entities, and a quick review of tax returns.Similarly, for a trust, the advisor may oversee or reviewwhat the trustee has done in the past year in terms ofinvestments, distributions, funding, etc.

Christopher R. Jarvis and David Mandell arecoauthors of The Doctor's Wealth Protection Guideand cofounders of Jarvis & Mandell, LLC(www.jarvisandmandell.com). They welcome questionsor comments at 800-554-7233 or dmandell@mandellpc.com.