Asset Protection Planning for Physicians

Physicians are extremely vulnerable to lawsuits because the profession is fraught with legal risk and they usually have high levels of income. In today’s society, any lawsuit may have a detrimental impact on a physician’s personal net worth. In order to minimize this exposure, physicians should consider implementing an asset protection plan. By implementing such a plan, it will help shelter assets from creditors and potential claimants. Although not all inclusive, the following three steps will allow physicians to start putting a plan in place to protect their personal accumulated wealth.

Insurance

The first line of defense in any asset protection plan is obtaining adequate insurance. “Adequate insurance” is an arbitrary term and may be based on a physician’s risk tolerance and/or in certain circumstances be imposed by a third-party. Although, there are many forms of insurance, the two key insurance products that every physician and/or practice group should own include are malpractice insurance and general liability insurance.

Malpractice insurance helps protect assets from lawsuits attributable to medical error. As expensive as malpractice insurance has become, it is still a practical necessity. If additional coverage can be obtained and the physician can afford it, serious consideration should be given for increasing the limits of coverage. This especially holds true for physicians practicing in high-risk specialties.

General liability insurance helps protect assets from lawsuits attributable to the general business operations of a practice. For example, general liability insurance will provide protection from a lawsuit attributable to a “slip and fall” accident. In today’s litigious society, even a “slip and fall” can result in a large lawsuit. As a result, physicians should ensure that they have adequate general liability coverage.

Choice of Entity

The second line of defense in structuring an asset protection plan is deciding which type of entity to form to operate your medical practice. The choices of entity are numerous and include general and limited partnerships, sole proprietorships, limited liability companies and professional corporations. These entities all have different characteristics, each one with its unique advantages and disadvantages. However, strictly from an asset protection standpoint, the professional corporation and the limited liability company are of greater significance.

Both the professional corporation (PC) and the limited liability company (LLC) provide an additional layer of protection for medical practitioners from the general debts and obligations of their practices. These entities will also provide protection against the wrongful acts or misconduct of the other officers, directors, members or owners of the entities. It is important to stress that these entities do not protect a medical practitioner from their own acts of malpractice. That is, each physician still remains personally responsible for his or her own acts of malpractice which puts his or her personal assets at risk.

In certain circumstances, medical practice owners may utilize both the PC and LLC to provide even greater asset protection. This is often the case when the owners of the medical practice also own the real estate or other significant assets. The real estate and/or assets can be owned by a separate entity and then leased to the operating entity. This will generally protect the real estate and assets from any potential lawsuit that is brought against the operating entity or vice versa.

Retirement Contributions

The third line of defense is to maximize contributions to “qualified” retirement plans. Retirement plans generally represent a significant percentage of most individual’s total net worth. The good news is a retirement plan that is classified as a “qualified” plan under the Employee Retirement Income Security Act (ERISA) is protected from creditors and/or potential lawsuit claimants.

There are two broad categories of plans that are considered “qualified” retirement plans under ERISA. These categories include defined contribution plans and defined benefit plans. The majority of retirement plans offered today are defined contribution plans. Defined contributions plans include 401(k) plans, 403(b) plans and profit sharing plans.

Individual Retirement Accounts (IRAs), including SEP and SIMPLE IRAs are not considered “qualified” plans under ERISA. As a result, physicians should maximize their contributions to “qualified” plans as much as possible.

The maximum total contributions allowed to all defined contribution plans, which includes 401(k) plans, 403(b) plans and profit sharing plans, is $49,000 for 2011. This figure is adjusted upward annually for inflation. This is significant in accumulating overall wealth but is also instrumental in protecting your wealth. As a result, if a physician can afford to, he or she should maximize contributions to these “qualified” retirement accounts.

In Summary

Every physician or practice should obtain adequate malpractice and general liability insurance coverage. If a lawsuit is brought against a practice group and the insurance coverage proves to be inadequate, operating as a PC or as a LLC will provide some additional asset protection. As previously mentioned, the PC and LLC will provide additional protection from the general debts and obligations of the practice and any wrongful acts or misconduct of the other physicians.

However, if the insurance coverage and the PC or LLC are not sufficient — the physician is being sued personally for malpractice — then the last line of defense to protect personal wealth will be the physician’s personal assets held in a “qualified” retirement plan.

Please note that an all inclusive asset protection plan may include re-titling personal assets, outright gifting of personal assets and the utilization of domestic and foreign trusts. However, these planning aspects are beyond the scope of this article.

John Teixeira, CPA, MST is a tax manager with Sansiveri, Kimball & Co. LLP. Located in Providence, R.I., Sansiveri, Kimball & Co. LLP, is a leading provider of accounting, tax and consulting services to the medical community. For more information about Sansiveri, Kimball & Co. L.L.P., or the topic discussed in this article, John can be reached at jteixeira@sansiveri.com.

Sansiveri, Kimball & Co. L.L.P. is also a proud member of the National CPA Health Care Advisors Association. HCAA is a nationwide network of CPA firms devoted to serving the healthcare industry. Members provide proactive solutions to the accounting needs of physicians and physician groups. For more information contact the HCAA at info@hcaa.com.