When it comes to malpracticeprotection, physiciansneed to realize thatthere is more at stakethan protecting their own assets. Otherconcerns to think about include: protectingheirs from taxes and third parties,making sure children receive thewealth they deserve, and minimizingfamily conflicts. The proper tools andtechniques used to protect your assetscan be separated into 2 categories: nontrustand trust.
By definition, non-trust techniquesare asset protection methods that donot have a trust status. Following is alist of today's most popular non-trustprotection methods:
• Retirement plans. The EmployeeRetirement Income Security Act (ERISA)protects retirement plan assets as long asthey are held in a federally qualified plan.They are generally protected from thecreditors of employers and employees.ERISA does not protect IRAs, nonqualified executive retirement plans, or deferredcompensation plans.
• Corporations. This type of entity isdivided into a few groups: shareholders,directors, and officers. Shareholders arethe owners, and bear risks associatedwith the activities of the corporation tothe extent of their ownership in the corporation.Other assets belonging to allthree groups are generally not subject tothe risk of corporate activity. This is anexcellent method of protecting theshareholder's assets from liabilities ofthe corporation.
• Limited liability companies (LLCs).The liability of the owners (ie, members)is limited to their ownership interest inthe company. LLCs have the liabilityprotection features of a corporation, butprovide the same pass-through taxationas partnerships. Creditors who seize amember's interest have no right to becomemembers without the other members'consent. Judgment creditors arelimited to obtaining a charging orderagainst the member's interest, but usuallycan't take control of the entity. LLCs are not very effectivein bankruptcy and lack establishedlegal precedence.
• Limited partnerships (LPs). Thisentity consists of two or more ownersâ€”at least one limited partner and onegeneral partner. General partners manageand control the assets of the partnership and are liable for debts. Limitedpartners are only liable for partnershipdebts to the extent of their investment.LPs are usually reserved for large estatesor assets, and allow for a more controlledtransfer of wealth between generations.Creditors of individual partnerscan only reach the interest in partnership,not the partnership's assets.
• Marital property positioning. Thisinvolves a variety of techniques, whichare designed to ensure that the spouseleast at risk for judgments or debts ownsthe assets. It's usually a simple and inexpensiveasset protection method. It'squite effective when one spouse earnsthe majority of the income. Of course,the downside is divorce.
• Life insurance. While a life insurancecontract does not protect existingassets, it does provide a death benefit toa beneficiary. Although state laws vary,many protect the proceeds payable toa spouse and children from creditorclaims. In addition, the cash value oflife insurance policies is shielded fromcreditor claims in some states.
• Disclaimers. This is a techniquewhereby an heir or beneficiary refusesto accept property given as a gift orthrough a will or trust. Assets that aredisclaimed are not subject to the disclaimant'screditors or gift taxes. Thereare numerous rules governing this techniquethat should be considered beforeyou make any decisions.
Active Trust Protection
Trusts are a type of ownership, whereproperty is held by one individual (ie, thetrustee) for the benefit of another individual(ie, the beneficiary). There aremany types of trusts today. Following isa list of popular trusts:
• Credit shelter trusts. Probably themost common type of asset protectiontrust, it permits the first spouse to utilizethe applicable death tax credit. a tax savings at the death of thesecond spouse. This trust is effectivewhen created by substantial gifts. Becauseof federal and state gift tax consequences,careful consideration is a must.
• Charitable remainder trusts. Thistype of trust provides for the paymentof a specified amount to a beneficiaryfor a fixed period of time. After thistime, the trust terminates and theremainder is paid to a charity. The onlyinterest in the assets that remains vulnerableto creditors is the right to specifiedpayments retained by the donor.
• Marital deduction trusts. This trustpasses assets to the surviving spouse forlife. It permits the assets to qualify for amarital deduction in gift and estatetaxes. The qualified terminable interestproperty trust is the most common maritaldeduction trust. It can provide assetprotection against the transfer of assetsafter remarriage.
• Generation-skipping trusts. Designedto preserve assets for severalgenerations while avoiding estate tax, ageneration-skipping trust does not requirea professional trustee. It is mainlyused to transfer enormous amountsof wealth over long periods of time. Extreme care is needed to followIRS tax rules.
William B. Howard, Jr, is presidentof William Howard & CoFinancial Advisors, Inc, a fee-onlyinvestment and financial planningfirm in Memphis, Tenn. He has 23years of experience working withphysicians and was named 1 of the top 150 advisors.He welcomes questions or comments at 901-761-5068 or firstname.lastname@example.org.