Are You Partners in Life & Liability?

Physician's Money DigestSeptember15 2003
Volume 10
Issue 17

Married couples, where both spouses are professionalswith high liability exposures, likephysicians, have a hard time taking advantageof many of the traditional asset protectiontechniques. Most asset protection techniquesplay off of family relationships. Assets are moved fromthe high-liability-exposure spouse to the other spouseand/or children. Dual professional couples lose about75% of the standard asset protection options. So howdoes a couple protect their assets?

Avoiding Pitfalls

First, try to evaluate the relative liability exposure forboth spouses. One spouse will usually have a lower liabilityexposure than the other. Or, the couple can adjusttheir practices so that 1 spouse will have a reduced liabilityexposure. A larger proportion of assets should besheltered behind the spouse with the lowest liability.

Passive assets that do not carry an inherent liabilityshould be sheltered behind the spouse with the smallestprofessional liability exposure. Passive assets include thehouse, bank accounts, brokerage accounts, and otherassets that you will not get sued over.

Cars, stock in the medical practice, the rental unitwith lead paint, and other high exposure assets shouldbe shifted to ownership behind the spouse with thehighest professional liability. Hopefully, the value ofthe passive assets will be substantially higher than theother assets and the couple can shelter a high percentageof their wealth.

However, it should be noted that stacking ownershipof all of the assets with 1 spouse could be disastrousfor estate tax planning. Assume the wife is theOB/GYN doctor with a high liability exposure andthe husband is a dermatologist with a low liabilityexposure. Asset protection theories dictate that thehusband owns all the passive assets. If the husbandowns all the assets and the wife dies, there will not beenough assets in her name or joint ownership to fundher estate tax exemption equivalent ($1 million). Thefamily could end up paying a lot more estate taxesupon the husband's death, because little or nothingwas sheltered at the wife's death.

Whenever assets are divided between the spouses,ownership should actually be held in a living revocabletrust. Each spouse should have their own trust. Theremay be 2 actual trust documents or simply 1 documentthat establishes the 2 trusts, but the trusts must be separate.In theory, the trusts will not provide any asset protectionbeyond just dividing the property, but you mustuse the trusts to prevent a probate mess when 1 spousedies. The surviving spouse doesn't want to have to probatethe house they live in.

The Dotted Line

If the husband and wife actually work together orrun a corporation together, don't appoint both as officersand directors. Having 1 spouse be the president and theother the secretary/treasurer of the corporation is a hugemistake. Have the spouse who already has the highestliability be the officer and director. That spouse shouldnot be holding the passive assets, so if the corporationgoes down, the passive assets should be protected.

Don't sign loans together. Being a professional, eachspouse should be able to qualify without the other.Never list his and her assets together on the same sheet.You have to treat them that way if you want the courtsto keep them separate. Even in community propertystates, spouses can own separate assets.

Create limited liability corporations (LLCs) or corporationsto operate your practice, own the buildingand equipment, manage the rental units, and operateany other business activities you have. Move themembership interests in the LLC to your children oranother LLC that is established to hold the interestsand passive assets. The low liability spouse and childrenwill own this LLC. Use an LLC rather than acorporation, because the formal requirements thatmust be followed to maintain an LLC are far fewerthan those required to maintain a corporation.

Use annuities and life insurance policies to holdcash rather than mutual funds. Some states protectannuities from creditors and suits and most states protectlife insurance. Don't use IRAs, because they areonly protected by state laws. Benefit plans and qualified retirement plans (SEPs, 401(k)s, 412(i)s, profitsharing plans, etc) are protected by federal law.

Lee R. Phillips, an attorney of the US SupremeCourt, has taught more than 5000 classes to insurance,accounting, legal, medical, dental, and otherprofessionals, and has written hundreds of articles.He welcomes questions or comments at 800-806-1997 or

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