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Armor-plated assets: How to protect your property

Asset protection is a way to keep your possessions safe from legal costs. Here's what to know before you use this technique.

By Katherine Vogt, amednews staff. June 23, 2003.

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Harold Labinsky, MD, a general surgeon in Elk Grove Village, Ill., recently attended a planning meeting for a medical liability reform rally. One physician told Dr. Labinsky, chair of the Chicago Medical Society council, that he wouldn't be rallying. He wasn't concerned about liability, the doctor said, because "I put everything in my wife's name."

That physician had discovered asset protection, a hot topic among physicians who hear horror stories about liability judgments or settlements that tap into family coffers and suck them dry. Asset protection, simply put, is a strategy for putting money, possessions and even some practice assets in a legal structure that would keep them off-limits from any litigation, whether it be liability, divorce or some other civil dispute.

Experts say there are plenty of ways to build a moat around your assets, and the perfect recipe for protection is probably different for each individual. Everything from creating business entities to trusts can be employed -- for a price and a little effort.

Many financial experts agree that the first gatekeeper to protect wealth is good medical liability insurance. Without it, physicians risk bankrupting their practices or being forced to come up with their own money to pay a lawsuit judgment or settlement. At the very least, experts say liability insurance can be used to pay for a legal defense.

But when good insurance is combined with good asset protection, which often means transferring ownership, a physician is less likely to be a target for lawsuits, said Charles Clawson, a certified public accountant and attorney in Las Vegas.

"Not owning anything doesn't mean you won't get sued. If you're sued and you lose, there won't be anything for the winner to collect," Clawson said. "By not owning anything, you make yourself less attractive to sue.''

Limiting your exposure

To some, the term asset protection may connote secret accounts set up by specious individuals in remote money havens like the Cayman Islands. But experts say asset protection in and of itself can be a legitimate financial tool -- even if your account is based overseas. And there are plenty of pitfalls if not done correctly.

You might already be using asset protection and not even know it. Pension and retirement plans, which may already be part of your financial portfolio, can serve as asset-protection mechanisms.

"Most of the time, [physicians] have a qualified plan, so I look to see if they are fully utilizing it,'' said Jeffrey Getty, a tax attorney and senior vice president of National City Trust Co. of Delaware.

Many retirement plans are protected against creditors and litigation, said Kristina Sommerkamp, a certified financial planner in Boca Raton, Fla. She said pension, money purchase, profit sharing and 401(k) plans are protected. IRAs, annuities and cash-valued life insurance plans are protected in some states, though not everywhere.

For assets beyond retirement savings, a simple tenet may guide the way to ultimate protection: The less you own, the less you can have taken away. That doesn't mean giving up control of the asset, but transferring the ownership interest to another entity, such as a limited partnership or limited liability company, a form of corporate organization commonly used by physicians for their practices.

In a limited partnership, assets are owned by the partnership, composed of partners who bring different levels of liability to the group. Often these are set up among families and then called family limited partnerships.

Experts are divided on how well these entities work. Rob Lambert, an asset protection consultant in Newport Beach, Calif., said the partnerships can be complicated and don't always provide bulletproof asset protection. He also recommends against putting everything into a spouse's name because assets can be swallowed in a divorce.

But James Putman, a certified financial planner in Appleton, Wis., said family partnerships can work well for parents who want to shift ownership of assets to their children while still maintaining control. He said these partnerships work best when used for assets such as marketable securities and business real estate.

Putman, former president of the National Assn. of Personal Financial Advisors, cautioned that these partnerships are scrutinized by the IRS and may come under attack if they are set up only for the purpose of tax benefits.

The ownership of assets also can be transferred to limited liability companies. These entities are a sort of hybrid between partnerships and corporations in which members can have different ownership interests. Getty said most LLCs have one controlling partner and several limited partners. The limited partners are typically protected when a creditor is trying to reach the underlying asset.

These entities can be used for many types of assets in layers. For example, a physician group may set up an LLC to take ownership of the practice's expensive medical equipment. The LLC then leases the equipment back to the practice. So if someone sues the practice, the equipment is protected because it is not owned by the practice. And the group may have a different LLC that owns other practice assets.

The general idea is to have many layers of protection by divvying up assets into separate "baskets," said accountant and attorney Clawson. He said appreciable, less risky assets such as stocks and bonds should be lumped in one basket. Another basket might contain real estate.

Other business entities that can take on assets include C corporations and S corporations, which vary in terms of ownership qualifications and tax consequences.

Business entities have become popular forms of asset protection, but can be vulnerable to creditors if they are not treated properly.

"The No. 1 rule to follow in asset-protection companies, like LLCs, is strictly following corporate formalities. You've got to be a formally organized company. And never, ever, ever intermingle, co-mingle, integrate -- any 'mingle' or 'grate' -- personal stuff with the company,'' Clawson said. Merely using a corporate check to buy personal groceries could expose the assets of the company and allow a court to question its legitimacy, he added.

A matter of trust

For those who want to avoid partnerships and corporations, assets can be protected in trusts. In a typical scenario, a trustee is designated to hold the ownership of assets for the benefit of another person. Experts say it is important to choose a trustee that can reliably handle the assets for a long time, such as a well-established bank.

Irrevocable trusts offer asset protection and are often used to protect life insurance policies and wealth that parents want to pass on to their children. But experts say they must be used with caution because they can't be changed or amended once they are established.

Financial planner Sommerkamp warned that these trusts sometimes have negative income tax consequences and may have restrictions on the amount of assets they can hold. She said it is also important to distinguish these entities from revocable trusts, which can be regularly changed but don't always offer asset protection.

Other trusts are held outside of the United States and are called foreign asset trusts or offshore trusts. Experts disagree on whether the trusts are a good idea, particularly because of the scrutiny they can draw from the IRS.

"You do bring yourself under closer scrutiny. Also, post 9/11, we're really in a different world today. It raises some eyebrows in other government agencies, I think," Getty said.

But Lambert said an offshore trust, when established to the letter of the law and disclosed to the IRS, is often worthwhile because it provides good asset protection. He said one of the main benefits of moving a trust overseas is that other countries do not automatically recognize legal judgments from the United States, so a creditor would likely have to navigate through the native court system before accessing the trust.

Hungry for information

Creating trusts or business entities, or even just seeking advice, isn't free. It often involves the work of financial advisers, attorneys and tax specialists. Putman said a typical, comprehensive asset-protection plan could cost $5,000 to $15,000 to establish and $3,000 to $60,000 annually to maintain. However, he said all the financial wrangling could save a fortune if a creditor goes on the attack, and it might even uncover some savings along the way.

The growing interest in this area among physicians was evident in the turnout for an asset-protection seminar put on last month by the Irving Park/Northwest Suburban branch of the Chicago Medical Society. The seminar counted nearly 85 guests, which the branch said made it one of its best-attended meetings ever.

"We have hungry sharks in the ocean," Daniel Schnuda, MD, branch president and an internist from Palatine, Ill., told the audience. "The first line of defense is to get tort reform passed in Washington. The second defense is to protect your assets."

At the meeting was Edward Diamond, MD, who specializes in pulmonary medicine in Elk Grove Village, Ill. He has taken steps to protect his assets, including putting money into his wife's name, setting up a pension plan and creating an irrevocable life insurance trust for his children.

"Asset protection is like buying insurance," said Dr. Diamond, who also has a master's degree in business administration. "I'm a very cautious person, so it's worthwhile."

The problem, said Dr. Diamond and others, is that it takes time and money to set up asset protection mechanisms. This prevents some people from doing it.

"Everybody is interested in it. [But] I just haven't gotten around to it," said A. Saavedra, MD, an anesthesiologist and pain-management specialist in Park Ridge, Ill. "It takes so much time and energy and cost. When you get into that, you wonder if it's worth all the trouble."

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