Protecting your assets: Don't be fooled

May 1, 2008

There are a number of popular misconceptions that arise when physicians discuss ways to protect their personal assets from lawsuits or creditors.

Key Points

A There are a number of popular misconceptions that arise when physicians discuss ways to protect their personal assets from lawsuits or creditors. It is helpful to identify the techniques you should avoid when it comes to effective asset protection strategies so you can make the right choices for your specific situation.

A revocable living trust protects assets. A living trust can be an excellent estate planning tool for many physicians. However, a living trust does not provide you with any asset protection during your life. Because these trusts can be altered at any time during the life of the person who created them, the assets in the trust can be successfully attached in a lawsuit. Remember, an effective strategy for estate planning may not be successful in protecting assets while you are alive.

Assets can be safely transferred to children or others and then transferred back once the case is closed. A transfer made after you are aware of the possibility of a lawsuit can be considered a fraudulent transfer, and thus will not provide the needed protection of those assets. In addition, even if you did transfer assets to children, those assets would then be at risk for any of the possible problems experienced by them. It generally does not make sense to expose your assets to another individual's risks.

Assets can be transferred to a spouse who does not have the same risk of being sued. While true in general, many physicians who follow this approach fail to take the necessary steps to complete these transfers so that a premature death of the spouse to whom the assets were transferred does not result in the loss of the protection intended. In addition, courts may declare that transfers made to a spouse resulted in a "constructive trust" where your actions are deemed to have created (unintentionally) a trust for your own benefit, fully available to satisfy a judgment against you.

If your practice is organized as a corporation, assets are safe. A professional corporation will not protect you from your professional liability or from the liability you have in supervising employees in delivering heath care. In addition, any assets of the corporation are at risk. At best, the corporate structure may provide protection of the actions of your staff that are unrelated to the delivery of care.

Jointly titled assets cannot be touched if only one of the owners is named in a lawsuit. One of the most common forms of property ownership arrangements is jointly titled with rights of survivorship, commonly abbreviated as JTWROS. This arrangement has provided an easy way to transfer ownership in the event of the death of one of the joint owners, since joint property avoids the probate process at the death of a joint owner. However, in most states, the JTWROS property can be the subject of a lawsuit if either joint owner becomes involved in a lawsuit.

Being the sole proprietor or general partner of your medical practice will shield you personally from creditors. It is important to avoid operating a business as a sole proprietor or general partnership. Operating a business as a sole proprietor occurs whenever an individual prefers not to go through the efforts of creating a corporation or other more formal business entity. Similarly, a general partnership exists when more than one person operates a business without going through the effort of organizing a corporation or other more formal business entity. The problem with these types of business arrangements is that you will have total responsibility for the debts of the business. The general partnership setting is even worse. You will be liable for the debts of the entire partnership, not just for the activities in which they were individually involved.