Simplify Your Asset Protection Strategy

Physician's Money Digest, July15 2003, Volume 10, Issue 13

It is critical that physicians developinvesting tools to shield their assetsfrom potential lawsuits. While investorsoften elect to establish sophisticatedtrusts, limited partnerships, and evenoffshore arrangements to protect assetsand help save on taxes, often they neednot be so creative. In many states, thelaw gives investors 2 tremendous vehiclesto protect wealth and lessen incometaxes: life insurance and annuities.


Every state has laws that shield certainassets from creditors, called"exempt assets," which are exempt fromseizure in a lawsuit or in bankruptcy.What types of assets are afforded thisprotection? Most common are the IRAand the home, which are protected bythe homestead exemption. Also protectedin many states are life insurance policiesand annuity contracts.

Life insurance policies in this case are"cash value" policies, or "permanentinsurance." Unlike term insurance, whichjust provides a death benefit, these policieshave cash accounts, which can growinto multimillion-dollar accounts. Formsof cash value insurance include: wholelife, variable life, universal life, and variableuniversal life. Under tax law, thesepolicies grow tax-free. Also, withdrawalsand policy loans can be taken against thecash account tax-free. In this way, cashvalue life insurance enjoys far superiortax treatment than any other liquidinvestment (eg, stocks, bonds, CDs, etc).

All 50 states have laws protecting lifeinsurance, but eachstate protects varyingamounts. The following are somegeneral protection trends.

• Most states shield the entire policyproceeds from the policyholder's creditors.Some also protect against the beneficiaries'creditors.

• States that do not protect theentire policy proceeds establish amountsabove which the creditor can take proceeds.For example, Arizona exempts thefirst $20,000 of proceeds.

• Many states protect the policy proceedsonly if the policy beneficiaries arethe policyholder's spouse, children, orother dependents.

• Most states also exempt term andgroup life policies.

• Some states protect a policy's cashsurrender value in addition to the policyproceeds. If you have substantial cashvalue in a life insurance policy, be sure toconsult your state exemptions to determinehow well protected you are.


There are 2 types of annuities: variableand life. Variable annuities are insurancecontracts that invest the contributionsinto investment vehicles on a tax-deferredbasis. A life annuity is an insurance contractwhere the investor pays a certainamount of money upfront, and the insurancecompany then pays the investor backat a fixed payment every month, quarter,or year for as long as the investor orinvestor's spouse is alive.

Many states protect annuities fromcreditor claims, though most do not. Inthe states that do exempt them, annuitiesare an ideal tool to safeguardwealth. If asset protection and tax reductionare important to you, learn whatassets are protected in your state. Onceyou do, you will have a better idea ofhow such investment options should beoptimized in your financial plan.

David B. Mandell and Christopher

R. Jarvis are coauthors

of The Doctor's Wealth Protection

Guide and cofounders of Jarvis

& Mandell, LLC, with offices

in Los Angeles and New York.

For more information, or to obtain a free

copy of "What to Do About the Medical

Malpractice Crisis," call 800-554-7233 (New

York) or 888-317-9895 (California), or visit