The most common misconception that physicianshave regarding their personal asset protectionis that it is black and white—either theyare protected or they are not. However, assetprotection attorneys approach a challenge much thesame as physicians approach a patient's condition—treatment is often a matter of degree.
In fact, we use an asset protection rating systemfor an individual's overall situation—from -5 (totallyvulnerable) to 5 (superior protection). Exposing businessassets, owning property in your own name, etc,are examples of -5 situations.
Keeping with the analogy, you may not recommendsurgery for a patient right away because thepatient is not sick enough to warrant surgery. Becausethis relates to asset protection, an asset protectionadvisor may not recommend the most protectivestructure for someone who doesn't need it.
If you are in a situation where you want good basicasset protection, but do not want to pay for moreadvanced tools, basic asset protection tools like familylimited partnerships (FLPs) and limited liability companies(LLCs) should be used. Essentially, these basic toolswill provide good asset protection against future lawsuits,allow for you to maintain control, and provideincome and estate tax benefits in certain situations.
Specifically, these tools tend to keep a creditoroutside the structure through "charging order"protections.These protections typically allow a physicianto create enough of a hurdle against creditors tonegotiate favorable settlements. For these reasons,we often call FLPs and LLCs the building blocks of abasic asset protection plan.
In essence, these tools will provide adequate assetprotection relating to an asset protection score of 2. Obviously,their asset protection benefits rely on properdrafting of the documentation, maintenance and respectfor formalities, and ownership arrangements. If theseaspects are carefully in place, a physician can enjoy basicasset protection for a relatively low cost.
For many physicians, a basic asset protection plan,which has potential vulnerability, is not good enough. A2 on their asset protection score is not enough to givethem the psychological comfort that they want. For thisreason, they should use advanced structures to put themselvesat a 4 or 5, the ultimate asset protection score.Those structures include the following:
•Foreign LLCs. If implemented in the right jurisdictions,properly structured, and holding their assets offshore,foreign LLCs can be a 4. Creditors based in theUnited States will have so many procedural hurdles andexpenses to even begin an attack, that they often settlefor a tiny amount up front.
•Foreign asset protection trusts. These are the elitetools of asset protection planning—the ultimate 5.When created in the right jurisdiction where US judgmentsare not respected, and where procedural hurdlesare toughest, most US creditors will give up rather thantry to attack these structures.
•Captive insurance companies. Structured offshoreor domestically, these tools can also reach the 5 status.Such companies can provide superior asset protectionfor a medical practice, and are extremely beneficial fortax planning as well.
•Enhanced debt shields. These strategies are idealfor protecting equity in real estate, especially the personalhome, where they would achieve a 4 rating. Whenstructured properly, after-tax wealth can be built whileprotecting real estate equity in a superior way.
•Funding of exempt assets. Each state law hasexempt assets that are ultimately protected under statelaw. Often, these assets can be combined with anenhanced debt shield to provide a 4 rating.
In your asset protection plan, make sure you understandthe cost and benefits of the various tools youemploy. It will help you to protect the wealth you havealready built, and may also assist you in building greaterafter-tax wealth for your retirement and beyond.
Christopher R. Jarvis and David B. Mandell are
coauthors of The Doctor's Wealth Protection
Guide and Wealth Protection: Build and Preserve
Your Financial Fortress (www.mywealthprotec
tion.com). They also started the financial firm
Jarvis & Mandell, LLC, and work with clients
nationwide. They welcome questions or comments
at 800-554-7233 or firstname.lastname@example.org. For a free
copy of The Doctor's Wealth Protection Guide ($8.95 for shipping
and handling), call 800-554-7233.