A successful lawsuit without enough insurance could threaten a lifetime of savings
In today’s litigious society, getting sued is not uncommon – especially for doctors. One in three physicians has a medical liability lawsuit filed against them during their careers, a proportion that goes up as a physician gets older.
Jury verdicts and settlements in malpractice lawsuit cases cost totaled $381 billion in 2017, reports the 2017 Medical Malpractice Trends Review. Even worse, 75 percent of doctors hit with malpractice lawsuits say they never saw them coming.
Of course, any kind of lawsuit can jeopardize a lifetime of savings if your assets aren’t sufficiently protected. And doctors, with a reputation for deep pockets, can be a coveted target for all sorts of claimants. Let’s take a look at the eight biggest mistakes doctors make during asset protection planning:
1. Underestimating the need for umbrella liability insurance. This inexpensive policy should serve as the first layer of protection for doctors. It won’t cover malpractice, but it offers protection if someone is injured by your car or on your property. But take note: too many people mistakenly insure the value of their assets instead of their risk exposure – your assets have nothing to do with the amount of a claim. Most doctors carry between $2 million and $5 million in umbrella coverage at costs that start at about $400 a year.
2. Overestimating malpractice insurance. Though most claims are well-handled by average policies, it can just take one successful huge claim to wipe out an entire practice. Every doctor should invest in comprehensive and current malpractice insurance – and make sure the coverage grows with your practice. But remember that while malpractice insurance is crucial, it doesn’t provide enough asset protection on its own if someone sues you for more than the coverage limit.
3. Not thinking through how assets are titled. Doctors should give careful consideration to how their assets are titled, especially if they’re married. Many states enable assets such as real estate and investment accounts owned by a married couple to be titled as “tenants by the entirety,” one of the highest levels of asset protection. Put simply, it protects jointly owned property of a husband and wife from creditors of either spouse.
This isn’t a bulletproof solution – it doesn’t protect the asset from joint obligations of the husband and wife. It’s also worth noting that if the judgment-less spouse dies first, tenant by the entirety protections disappear and creditors of the surviving spouse could seize the asset. Doctors also need to consider what will happen if the marriage ends in divorce.
4. Believing assets in all living trusts are protected from creditors. Revocable living trusts are created during your lifetime to hold assets that can pass to your heirs without probate upon your death. But while they can be an excellent estate planning tool, they are not safe from creditors. Since they are revocable – meaning the person who creates the trust can move assets in and out – a judge can also order you to use these assets to pay off creditors.
Irrevocable trusts provide asset protection. Once you establish an irrevocable trust, you no longer legally own its assets and can’t control how they are distributed. But beware: a court can undo a transfer to this trust if it finds that the transfer was made with the intention of defrauding creditors. For this reason and many more, it’s critical to begin asset protection planning well before you could become the target of any liability.
5. Assuming all retirement plans are protected equally. 401(k) and defined benefit plans are protected by federal law from creditors. But while IRAs enjoy some limited federal protections during bankruptcy proceedings, their protection is generally governed by state laws that can vary considerably and leave them vulnerable to creditors.
Inherited IRAs are also only protected in some states. If you plan to bequest a large IRA to an heir, make sure the state he or she lives in will give it the same protections as traditional and Roth IRAs.
6. Putting your name on the title of things you can’t control. Every car, boat, or other vehicle owned by your family should only be titled in its driver’s name. That’s because keeping each car titled solely in the name of the primary driver significantly lowers the risk of joint liability if an accident occurs. This rule is especially important when it comes to your children; per mile driven, teen drivers ages 16-19 are nearly three times more likely than older drivers to be involved in a fatal crash. If you have minor children who drive cars owned by you, transfer the title to their name as soon as they turn 18.
You should also be wary of co-owning high liability vehicles like snowmobiles and jet skis with other families – or even lending them out to friends. If something goes wrong, you can be sued if your name is on the title.
7. Failing to protect practice assets. Doctors will go to great lengths to protect their personal assets from potential lawsuits, but often neglect the assets of their practices. Any malpractice or employee claim such as sexual harassment against any doctor in your group threatens all the assets of your practice. Cash flow, the practice’s accounts receivables, and valuable real estate and equipment top the list of assets that need strategies for protection.
8. Perhaps the most overlooked asset protection strategy is not giving away too much of your income to Uncle Sam. A CPA who is experienced with advising physicians can devise a tax strategy – including but not limited to restructuring your employment relationship – that saves a huge amount of money.