Safeguard Your Assets with a Solid Wealth Preservation Plan

Physician's Money Digest, December15 2004, Volume 11, Issue 23

During the latter half of the 1990s, most physiciansweren't thinking about wealth preservation.That's because they were too busy buildingwealth. "Nobody really cared aboutwealth preservation," says Al Caicedo, a certified senioradvisor and founder of CKS Summit Group, an asset protectionfirm. "Everyone was becoming a millionaire."

A large percentage of investors had to feel comfortablewith the earnings they were accumulating. But, afterexperiencing an exhilarating ride to the top of the mountain,many investors have experienced a rocky roaddownhill. As a result, over the past 4 years, wealthpreservation has become increasingly important.

"If we held a seminar about asset protection trusts andwhat we can offer using the laws in Utah, and invited 50physicians, 49 would come," says Jan Culver, CPA, seniorvice president, trust services, for McDonald FinancialGroup. "That's a high turnout for doctors, who lead abusy life. But it shows the importance of this subject."

Building Blocks

The key to developing a well-defined wealth preservationstrategy is to have a solid foundation. Scott Mosley, afinancial consultant with Texas-based Cimarron Advisors,says the first step in building that foundation is creating adetailed assessment of your financial life. "Are you a 35-year-old married doctor coming straight out of medicalschool with $150,000 in debt," Mosley asks, "or are youa doctor who inherited significant assets early in life andnow those assets are exposed?"

Caicedo refers to this process as the baring of the soul."This is when everything comes out," he explains. "Onething I've seen is that people try to not be honest withthemselves. But we need to be honest about our finances.It's similar to going to the doctor. You have to tell the doctoreverything, and then you can arrive at a diagnosis."

Both Culver and Bruce Fenton, founder and presidentof Atlantic Financial, agree that financial assessmentshould take on the look of a complete balancesheet. In other words, it should take into account notjust asset protection, but whether you have enoughmoney to fund a college education and finance yourretirement. Fenton says this means asking yourselfsome very specific questions.

"One of the first questions I ask physicians is whatthey want the money for, and why it's important tothem," Fenton explains. "What is the real big-picturegoal? Do they want to set up a family trust and make suretheir grandchildren go to Harvard? Or do they want toprovide medical care to children in Nigeria? I really digdeep, because that's the basis of the foundation."

As for building that foundation, Mosley points outthat the simplest form of asset protection is a tax-deferredretirement plan. Qualified retirement plans, heexplains, are covered by federal legislation, making themexempt from creditors. Any type of profit sharing planor anything controlled by the Employee RetirementIncome Security Act is exempt.

Other elements to a solid foundation are a home, lifeinsurance, and annuities. These, however, are governedon a state-by-state basis. For example, in Texas andFlorida, an individual's home is completely exempt fromcreditors, even if it's valued at $5 million. Other statesmay not offer exemptions for homes, or may only offerexemptions up to a set limit, such as $100,000.

"The same thing applies for the cash value of lifeinsurance," Mosley says. "In Texas, the cash value of lifeinsurance is completely exempt from creditors, as areannuities. So the first thing to find out is what assets areexempt or qualify for exemptions and to what extent.That's the way you build."

Caicedo also points out that physicians often leavethemselves open to probate and estate taxes because theyhave not prepared wills and trusts. "These are the buildingblocks," he says. "You have to make sure you havea solid foundation before you get into anything else."

Personal vs Professional

At first glance, it might seem that physicians need tothink about wealth preservation from two perspectives:personal and professional. But according to advisors,these two elements really overlap. "Most physicians areindependent practitioners," Mosley says, "so they areincorporated. They're not working for a hospital or corporation.So from that sense, the two [personal and professional]really are indistinguishable. Frankly, as thephysician begins to accumulate assets, those assets movefrom the medical practice to the physician. The practicenever really accumulates assets. So [financial planners]try to concentrate on the total picture."

Mosley also points out that there are often misconceptionsabout the value of a practice. "It's difficult toplace a value on any type of professional practice. Andfrom an asset protection point of view, a creditor is notgoing to garnish 15% of your clients, but they will comeafter your personal assets. So in that sense, I really dealwith the physician's assets as opposed to the value of thepractice," Mosley says.

Fenton, however, sees even greater overlap, especiallyfor smaller medical practices. He points out that physicians"are so busy pulling drowning people out of theriver that they never stop to find out who's throwing themin." Caught up in the day-to-day work of saving lives, orat the very least improving the quality of lives, Fenton suggeststhat physicians need to step back and ask themselveswhat they're really trying to accomplish in their career."Physicians need to have a plan for their career, whetherthey own their own practice or they're part of a medicalcenter," Fenton suggests. "Are they trying to build equityto sell the practice to someone? Are they trying to maximizetheir income or see the most people possible?"

Fenton states that the difference between the happiestand most physically and emotionally healthy physiciansand the unhappiest and most burdened physiciansis direction. The first group takes the time to consider aplan and isn't driven by their career.

"It's critical for physicians to drive their own destiny,to know where they're going," Fenton says. "If you'rethe captain of your ship and you don't have a map tellingyou where you're going, you'll still get there, but somebodyelse is actually going to decide where ‘there' is."

One of the best ways to drive that destiny and keepthat peace of mind, Caicedo states, is to make sure thatthe assets of a practice are separately owned. That meansputting a practice facility in a partnership or limited liabilitycompany (LLC) and not in the physician's ownname to protect against liability. "It's important to havea separation of assets, to have the least amount of assetstitled in the physician's name," Caicedo says. "It'simportant to have a complete division, so in case there'sa lawsuit, the practice doesn't get hurt."

Asset Protection Trusts

In years gone by, when people talked about wealthpreservation and asset protection, the conversation oftenturned to the Cayman Islands or some other tax haven.People would stash money there, outside the UnitedStates, because creditors could not touch it. Those actions,of course, always raised the eyebrows of the curious IRS.

Recently, however, some states have determined thatcertain people have a right to have their assets protectedfrom creditors. These states have written advantageouslaws to help people. For example, on Jan. 1, 2004, Utah'sasset protection trust law took effect. The law, accordingto Culver, enables people to put money in an asset protectiontrust in Utah, and the document is drafted in sucha way that creditors cannot have access to the money.

"The trust requires very specific language, because ifthe person who sets up the trust has unfettered access toall of the assets in the trust, the creditor can get themtoo," Culver explains. "But don't bankrupt yourself tofund one of these trusts; save money over and abovewhat you need for normal living expenses."

In essence, a physician could place long-term investmentmoney in the trust with restrictions on how themoney can be paid out. If the trust documentsays the trustee shall not pay creditorsany assets from the trust and someonehas a judgment against the physicianor the physician is involved in a malpracticesuit, the trustee is not permitted topay out the money. The physician, as theperson setting up the trust, would workwith their attorney to set up the parametersof the trust, which then becomes partof the overall estate plan.

"These are not preprinted documentsthat you shoot off a word processor,"Culver says. "They're written for eachindividual's situation. And what's wonderfulis you don't have to live in Utah. Youcan live anywhere, you just need to have acorporate trustee who is located in Utah.Your lawyer, who will draft the trust document,doesn't have to be a Utah lawyer,either. The trust just has to be administeredunder Utah law, and a trust is a separate,legal entity just like a corporation."

Various Tools to Use

These days, the financial, legal, andtax worlds have become so complex andare now so closely tied together, itbecomes impossible to have a successfulwealth preservation plan without coordinatingthese three areas. For example,Fenton points out that if an attorney setsup your trust but you don't have aninvestment professional funding thattrust, the paper is completely worthless.

There are many tools to consider in awell-integrated wealth preservation plan.One that ought to be considered, Mosleysays, is long-term care. "There are somevery good long-term care products on themarket," Mosley explains, "but a lot ofpeople are averse to spending money upfront in order to have that guarantee atthe end of their lives."

As such, Mosley focuses on the importanceof disability insurance, and to someextent key person insurance for physicianswith their own practice, then ties in thelong-term care aspect down the line.

"If you can't work, you can't eat," heexplains. "So regarding the maintenanceof a constant income stream in the eventyou become disabled, disability insuranceis a key component. And the tie-in backto long-term care is that you can have disabilityinsurance that converts to long-termcare upon retirement. That's a wonderfulcombination package."

Mosley also points to a family limitedpartnership or LLC as excellent methodsof asset protection. He explains thatwith the family limited partnership, creditorshave access to distributions thatwould come to the physician, but thosedistributions are solely at the discretionof the partnership. Any gains the partnershipincurs are put on the books, andthe creditor then has the tax burdenwithout the distribution, making it a veryunattractive asset to own.

"Similarly, you can put in bylawsand make it difficult to sell shares of theLLC," Mosley adds. "A creditor can'tget a medical license and begin to practice.That also makes the practice a verydifficult asset to sell."

Perhaps the most important aspect ofany wealth preservation or asset protectionstrategy is to review and update thatstrategy. Even a scripted life is going toturn out differently than what you anticipate.So, once a year, and at major milestones,such as the death of a parent orbirth of a grandchild, make certain to sitdown with your advisor and adjust yourplan as necessary.