In Ohio, as in many states, physicians are seeking to scale back their medical malpractice insurance coverage in order to reduce the cost of carrying such professional liability insurance. As a result, physicians are exposing more of their personal assets to liability. Accordingly, as this trend continues, physicians will need to find different ways to insure against the exposure of their personal assets to liability.
Two keys to any successful asset protection plan are timing and structure. Asset protection that takes place after there is a known threat of a lawsuit will likely fail to stand up in court because the transfers involved will be deemed fraudulent. Properly structured asset protection plans are based upon sound legal principles and do not involve hiding or concealing assets or otherwise defrauding creditors. Plans such as these accomplish the following objectives:
- Discouraging Litigation – An asset protection plan is designed to discourage a lawsuit before it begins.
- Allowing Access to Funds – An asset protection plan will keep assets free from attachment and liens and allow the physician access to funds.
- Ease of Operation – An asset protection plan should allow the physician to deal with property without difficult or burdensome restrictions.
- No Loss of Control – An asset protection plan should allow continued control and enjoyment of property.
- Consistent with Estate Plan – An asset protection plan must be consistent with an existing estate plan.
- Protection of Family Assets – An asset protection plan must accomplish the primary purpose of insulating and preserving family assets.
A variety of tools exist that may be used in order accomplish these objectives, including, but not limited to, the following:
- Transfer to Spouse – To the extent that a physician does not want to relinquish control, the physician should consider transferring the assets entirely over into the name of the spouse. However, if the physician is in a shaky marriage, this may not be the best asset protection planning.
- Irrevocable Trusts – By relinquishing unfettered control over the assets placed in the trust, the physician effectively protects the assets from the claims of litigants. Although irrevocable trusts can provide a tremendous asset protection, strict adherence to the irrevocable nature of the trust document is crucial in order to open the assets to the claims of creditors and litigants.
- Family Partnerships and Other Limited Liability Entities – Many physicians utilize family partnerships as a form of asset protection. Typically this involves the formation of a limited liability entity and transferring family investment assets into it. Parents are typically the initial owners and thereafter gift ownership interests (usually nonvoting, non-control interest) to children. Not only does this setup serve an estate planning purpose, but it protects the assets transferred from creditor attack by limiting any one owner’s liability to his or her interest in the entity.
- Off-shore Trusts – Some physicians have utilized “off-shore” trusts, created under the laws of foreign states and nations, to provide a degree of protection against the claims of litigants. Off-shore trusts can often provide benefits to physicians that cannot be realized using domestic trust instruments. However, off-shore trusts are costly and can be a risky tool depending on the stability of the foreign jurisdiction.
- Qualified Retirement Plans and IRAs – Pursuant to Ohio and federal law, ERISA qualified benefits provide protection from creditors and litigants to the extent that the benefits are not yet distributed to the employee participant. In addition, under Ohio law, IRAs are generally protected from the claims of creditors and litigants.
- Life Insurance – In Ohio, life insurance proceeds are exempt from claims of creditors if there is a clause in the subject policy that prohibits the proceeds from being used to pay a beneficiary’s creditors. In addition, the Ohio Revised Code provides that life insurance proceeds designated to the spouse are exempt from creditor claims. Some physicians leverage their accounts receivables by pledging them and obtaining bank financing to purchase life insurance.
Since each physician’s situation is different, please contact your attorney to develop an asset protection plan that meets your personal situation.
NOTE: This general summary of the law should not be used to solve individual problems since slight changes in the fact situation may require a material variance in the applicable legal advice.
James F. Contini II, Esq.
Certified Specialist in Estate Planning,
Trust & Probate Law by the OSBA
Krugliak, Wilkins, Griffiths & Dougherty Co., LPA
158 North Broadway
New Philadelphia, Ohio 44663