Asset Protection for Physicians

Physicians consider themselves targets, and they are, but their biggest predators are not personal injury lawyers. The average physician is not likely to be successfully sued in excess of their reasonable medical malpractice limits – such verdicts are actually very rare and nearly all could have been settled within the limits of the physician’s coverage.

Where physicians are most likely to lose wealth is through bad marriages, bad investments, bad tax planning, or a combination thereof. The average physician usually can’t name a colleague who got cleaned out in a medical malpractice lawsuit, but they can readily name a list of buddies who have lost money to ex-spouses, in various investment schemes, or they got burned in a tax shelter.

Indeed, physicians are stalked by a variety of promoters hawking all sorts of schemes, from tax shelters such as Irish/Barbados employee leasing schemes, to screwy and hyper-risky investments, to cookie-cutter offshore asset protection structures, and all sorts of other questionable schemes. Some groups even exist to market just to physicians, and offer them a veritable buffet of canned products and services that are advertised as meeting the specific needs of physicians but are simply mediocre or questionable solutions that have been repackaged with an MD logo.

Some of these groups adopt fancy names to try to sound respectable, such as “American Foundation for Physician Justice and Asset Protection”, and claim that they have been “endowed” by grants. Most of these scams are run from the Salt Lake City area, and they work by holding seminars enticing physicians to spend $2,000 or more on (worthless) kits that purport to allow them to form family limited partnerships and various special trusts. Usually, the seminars are loaded with paid shills who at the conclusion of the seminar will stand up and rush to the back, so that purportedly they won’t be the last and not get one of these kits, and thus trying to stampede the rest of the crowd to do the same. After the seminar, the checks of the shills are torn up of course, and the physician takes his kit home to self-create a nightmare of tax consequences for himself.

How good are these kits? Let’s put it this way: If you bought a kit with a laser pointer and a how-to videotape and a guide to performing laser surgery on your own eye, would you start pointing the laser pointer into your eye hoping that it would eliminate your need to wear glasses? That’s about the level of sophistication that these kits offer, and the structures they tell you to set up suffer from glaring defects, such as making the physician the general partner of his own family limited partnership. These kits also create tax nightmares.

This isn’t to say that physicians do not need asset protection, but that the asset protection they are getting usually isn’t what they need. But in attempting to satisfy those needs, a significant problem is that the average physician simply doesn’t have enough wealth to make the best planning cost-effective. The better solutions that are available to a small business owner making $5 million or more per year and having a net worth of $30 million or more, usually make no economic sense for a physician struggling to net a million or two per year after taxes. Thus, physicians tend to end up in one-size-fits-all legal or financial products than personalized planning for their unique needs. While the use of some product solutions is necessary to keep costs down, physicians still require a holistic and blended legal, financial and tax plan.

Strategies to Avoid

Foreign Asset Protection Trust – Although offshore trusts are mass-marketing to physicians as asset protection tools, they work very poorly for physicians. The reason is that the Anderson and Lawrence decisions have demonstrated that all a creditor needs to do is to ask the court to enter a repatriation order (“bring all the assets back to the U.S.”) against the settlor of an offshore trust, and if the settlor doesn’t bring the assets back to the U.S., then the court simply throws the settlor in jail until he does. This creates an important limitation on offshore trusts: They work only if you are prepared to flee the United States.

The problem for physicians is, of course, that their practices are in the U.S. and they probably couldn’t make anywhere near the revenue outside the country that they do in it. Thus, although lots of physicians have been sold offshore trusts, what happens in real life is that the physician doesn’t want to either flee the country or spend time in jail, so that when litigation arises they end up abandoning the offshore trust that they spent so much money for. In other words, when push comes to shove the offshore trust is worthless unless, again, you are willing to flee the country.

Before considering a Foreign Asset Protection Trust, better check out the collection of cases at … fshore.htm first. A physician who has a Foreign Asset Protection Trust might even consider getting rid of it to avoid later possible problems.

Professional Leasing Companies – This is a tax scam whereby the physicians fires himself from his own professional practice, and then is re-hired by an employee leasing company situated usually in either Ireland or Barbados. The physician’s practice pays large employee leasing fees for the physician’s services to the Irish or Barbados company, which then pays the physician a small salary and drops the rest into a non-qualified deferred compensation account, known as a “Rabbi Trust”.

While all this sounds neat, the IRS considers it to be an abusive tax shelter, and the U.S. Department of Justice has started prosecuting those who have participated in these schemes. See

Basic Corporate Planning Strategies

Professional Corporation – A professional corporation will not, by statute, shield the physician from professional negligence claims. The professional corporation might, however, be useful in encapsulating within it the liability from other claims, such as employment practices claims made by staff, certain toxic materials claims, etc. Additionally, the use of a professional corporation may later give tax planners some options if the practice is later sold.

Equipment Leasing – Many physician practices require expensive medical equipment, such as CT scan or laser-vision machines. If these machines are owned by the practice, or worse by the physician individually, any equity in them is exposed to creditors. Even worse, a valuable opportunity is being missed to strip wealth from the practice by way of an equipment leasing entity. Basically this arrangement involves a new limited partnership or LLC that is set up for no other purpose than to hold the equipment used in the practice. The existing equipment is then either sold or contributed to the equipment leasing entity, which then leases it back to the practice. Every dollar paid to the equipment leasing entity for use of the equipment is a dollar that is removed from the potential reach of the practice’s creditors.

It is not just enough to set up a leasing company and call it a day. The ownership of the leasing company must be structured so that the company cannot be seized by creditors, or the creditors can convince a court that the arrangement is a sham.

Property Leasing – Many physicians own the building from where their practices do business. By separating the “dirt” from the practice, a physician creates an additional avenue to strip money from the practice and thus away from future unknown creditors. As with equipment leasing companies, it is not enough to simply put the dirt into a different entity. The entity must be structured so that a creditor cannot seize the entity or convince a court that the leasing arrangement is a sham.

Integrated Estate Planning Strategies

Family Limited Partnership or LLC – When properly done (which, by the way, is a rarity), a structure involving one or more Limited Partnerships or LLCs can provide substantial asset protection for a portion of the physician’s assets.

As with Foreign Asset Protection Trusts, the problem with these structures is that they are often sold as the only solution for the physician. While these structures can solve some problems – and should be used for the problems – they are unsuitable for solving many of the asset protection issues face by physicians.

Premium Financing – Traditionally a method of purchasing large amounts of life insurance, premium financing also can have the benefit of encumbering real estate, stock accounts, and other valuable assets, thus denying their benefit to creditors until the life insurance policy pays out. Because most creditors will probably not want to wait possibly decades to get at the assets, settlement is facilitated.

Insurance Strategies

Umbrella Insurance – Although umbrella insurance is not meant to act as a substitute for the physician’s medical malpractice insurance, umbrella insurance does play an important role in make the physician’s other asset protection better insofar as it can often be taken into account if a court attempts a “solvency analysis” to determine whether a fraudulent transfer has occurred. Also, if litigation does arise, a plaintiff’s attorney may well become fixated on hitting the umbrella insurance policy chasing the limits of the umbrella insurance policy, to the exclusion of the physician’s other personal assets.

Captive Insurance Company – Physicians always want to know whether a captive insurance company makes sense for them, and it almost never does. Typically, the insurance policies issued by a captive cannot be used for hospital privileges, the formation costs and ongoing expenses are too high, and frankly most physicians do not have enough wealth to capitalize an insurance company and spread the risk against a run of bad luck in underwriting.

Cell-Captive a/k/a Rent-A-Captive – Physicians are often scammed into participating into what is known as a “cell captive” whereby they pay premiums to an insurance company that segregates their premiums into a “cell”, and basically the only “reserves” they have available to pay claims is whatever they have collected in their own accounts. There are many problems with this, with the first problem being that either the hospital where they need privileges either will not accept the coverage or they are making misrepresentations to the hospital about the true nature of their coverage. The second problem is that the physician is taking a deduction for the premiums paid, but because there is no true risk shifting or risk sharing such arrangements probably will not pass IRS scrutiny if the arrangement is audited. Finally, a single claim can clean out their account and leave them exposed again.

Group Captive – Sometimes a group of physicians can group together to form a captive insurance company that they all own, and which underwrites various risks of their practice. While this arrangement makes tremendous sense, group captives for physicians are usually never successfully put together. There are several reasons for this, primarily that each physician is concerned that one or two significant claims by her colleagues will wipe out the company’s reserves and leave her own policies issued by the company worthless. Although these concerns can be mitigated in several ways, such captives rarely get past the discussion stage.

Risk Retention Group – Despite the problems with captives, there should be no doubts that risk retention groups (RRGs) make tremendous sense for physicians. Basically, a RRG is an insurance company that is licensed in one state (usually a state with “captive” legislation) and then qualifies under the federal risk retention statute for treatment as an RRG, meaning that it only has to notify other states that it is doing business there without affirmatively obtaining the other state’s approval. RRGs are regulated by the home state like any other insurance company, with the limitations that the policies it underwrites must be homogenous, its policyholders must by homogenous, the policyholders must own some portion of the company just like a mutual insurance company, and the RRG does not underwrite life insurance, workers compensation insurance, and several other types of policies.

The downsides to RRGs are that they usually have to have at least a few dozen members before they even start to make economic sense, and they function best when there are hundreds of members and can take advantage of the law of large numbers in underwriting. With the crisis in medical malpractice insurance that followed the investment markets decline of 2001-2002, new RRGs for physicians blossomed like wildflowers after a summer rain, with nearly 30 new RRGs for physicians being formed in 2003 alone. For the initial physician owners who start the RRG, there are tremendous money-making opportunities in addition to filling gaps in the availability of medical malpractice insurance. Another advantage of RRGs is that they have more latitude to “cherry pick” quality risks, i.e., not accept high-liability specialties like obstetrics.

Employee Benefit Strategies

Most physicians have IRAs and other pension plans, but depending on the states (or where they are sued) these plans may afford little or no protection against creditors – indeed, in some jurisdictions retirement plans are often attractive targets for creditors. From an asset protection perspective, a better type of planning involves certain advanced benefit plans, such as Section 419e Welfare Benefit Trusts or Section 412(i) Defined Benefit Plans.

The attractiveness of these plans is that since they are created for the benefit of the employees and not the owners, the assets in these plans should not be available to creditors of the business.

Because of these benefits, some form of ERISA planning usually makes sense for physicians, especially since they can simultaneously reduce their annual income tax paid since contributions to these plans are normally made pre-tax.

Collateralization Strategies

Accounts Receivable Factoring – Typically, one of the largest assets of the physician practice is also the asset which is most exposed to creditors: the accounts receivable. This is also a “non-working” asset, i.e., the value of the accounts receivable is not earning any investment income. By borrowing against the receivable, also known as “factoring”, they physician can effectively strip its value to creditors, while simultaneously leveraging the asset for investment purposes. During the last several years, major insurance companies and finance companies have developed sophisticated programs to facilitate the factoring of accounts receivables. These programs can and should be enhanced to provide significant protection for this valuable, and usually completed exposed, asset.