The authors debunk several popular notions surrounding the protection of personal assets from malpractice litigation
As the malpractice-litigation crisis worsens by the year, medical professionals are increasingly concerned that they will be sued. Unfortunately, many methods for protecting personal assets from lawsuits remain surprisingly ineffective and outdated.
Year after year, the advice to place your home and other assets in your spouse’s name is passed from physician to physician and even from lawyer to physician. And plenty of evidence shows that the same erroneous advice is being given by estate-planning and financial-planning advisers as well. What seems to elude these well-meaning advisers is just how dangerous these practices can be in the 21st-century litigation environment.
These myths give physicians a false sense of security and expose them to serious vulnerability. The following statements include some of the more common—and incorrect—advice being given to the medical community today.
Owning assets in my spouse’s name will protect me. Statutes now allow trial attorneys to carefully scrutinize the transfer of property and belongings between family members. The Uniform Fraudulent Conveyances Act and Uniform Fraudulent Transfer Act1 outline instances in which transferring your home or other assets into your spouse’s name can be the basis for fraud.
In addition, if a physician’s spouse is affiliated with the medical practice, even in simple accounting or secretarial capacities, he or she may be sued as an “implied officer” of the medical corporation. With both spouses as codefendants, it makes little difference which spouse owns the family assets, because both marital partners may be subject to pay the judgment. The nonphysician spouse may, in fact, have to pay a portion of the judgment without the luxury of malpractice insurance.
Professional liability aside, if the physician’s spouse owns all of the family’s assets, that spouse can have liability for auto accidents, accidents in the home, and other general liability associated with ownership. Thus, merely holding the assets in the other spouse’s name is a strategy that does not protect assets.
Be aware that transferring the ownership of assets to another person also transfers complete legal control to them. These assets can then be “commandeered” by the legal owner if he or she becomes a disaffected family member.
For example, in a divorce, a physician may have a very difficult (and awkward) time recovering his or her due portion after placing all assets in the name of a now-estranged spouse. Worse yet, if a spouse becomes angry and vindictive enough, assets could simply disappear altogether. Retaining control of family assets does not show distrust for family members as much as it shows regard for the physician’s children, especially in the case of a second marriage.
Solution: Professionals who use this technique should consider other ownership structures that may entail less risk. For example, titling a home as “tenants in common” or “tenants by the entireties” (if allowed in your state) is generally less hazardous than owning a home in joint tenancy or in the name of just one spouse.
Professionals who truly want to judgment-proof personal assets, however, should consider owning them in a specialized legal entity, such as a single-member limited liability corporation (LLC) or a family limited partnership (FLP) that has been specially designed for lawsuit protection. Keep in mind, however, that to preserve the tax benefits of home ownership, professional help may be required. When structured properly, an LLC or FLP can be a superior alternative to owning family property in the name of just one spouse.
If a lawsuit occurs, my assets can simply be transferred to another’s name. This is called fraud. As mentioned above, the Uniform Fraudulent Conveyances Act and the Uniform Fraudulent Transfer Act explicitly state that transferring ownership of family assets to others is fraudulent if done as a reaction to a lawsuit. Even if assets are transferred in reaction to a situation that may result in a lawsuit (such as a misdiagnosis or a medical injury), courts may still find the transfer as an attempt to defraud creditors before a lawsuit is actually filed.
Solution: Courts generally find that asset-protection measures implemented before there is a threat of a specific lawsuit are appropriate and sound planning measures. With health care professionals increasingly the target of lawsuits, protecting personal assets well before a lawsuit arises is an excellent form of preventive legal medicine.
The law will protect my assets. Probably not; it depends on your state. In only six states (Florida, Iowa, Kansas, Oklahoma, South Dakota, and Texas), primary residences are protected from being seized in bankruptcy cases or lawsuits. In five other states (Arizona, Massachusetts, Minnesota, Nevada, and Rhode Island), more than $100,000 of equity in homes is protected.
The remaining 39 states, however, have woefully outdated laws that generally protect between $10,000 and $50,000 in home equity. Homes in these states may be seized to pay judgments resulting from lawsuits. While this is not a common occurrence statistically, its impact is devastating when it happens.
Some states protect life insurance policies, and the federal Employee Retirement Income Security Act of 1974 (ERISA) protects most qualified retirement funds such as 401(k)s and pension plans. But all other personal assets (including bank accounts, investment accounts, IRAs, vacation homes, and automobiles) generally warrant no protection whatsoever; 26 states and the District of Columbia have “tenants by the entirety” laws, which offer some protection to assets owned jointly between spouses.
Solution: Become familiar with your state’s asset-protection laws. Ask a qualified asset-protection professional about taking advantage of your state’s laws.
Political reforms are solving the problem. Tort and insurance reforms can play an important role in resolving the malpractice crisis, but political reforms are often slow to produce tangible results. One of the obvious culprits for the slow pace is the notoriously well-funded American Trial Lawyers Association, which seems to specialize in stalling tort reform across the country.
Trial lawyers have a way of developing new angles for circumventing inconvenient laws. Some states’ legislatures have passed caps on lawsuit judgments one year only to have them ruled unconstitutional by the state’s supreme court the next. Examples are: Jones v State Board of Medicine (Idaho); Wright v Central Du Page Hospital Association (Illinois); and Simon v St Elizabeth Medical Center (Ohio). In other states, such as Arizona, Arkansas, and Wyoming, payout caps of any kind are forbidden by the states’ constitutions.
Solution: Physicians can press for political solutions that may help them remain profitably in practice by becoming active in efforts to reform tort laws. Support reforms such as capping lawyers’ contingency fees, limiting joint and several liability laws, and regulating malpractice fees. However, you should realize that political reform is slow and can be too little, too late.
Nonpolitical solutions that can be controlled by physicians will prove to be more immediately protective. Many physicians have justifiably developed a defensive approach to practicing to avoid becoming victims of malpractice suits. Pay particular attention to the way you and your staff prepare medical records. Remember that lawsuits are not a search for truth: They are contests often won or lost on the prejudices of the jurors and the effectiveness of the trial attorneys—regardless of the merits of the case.
Living trusts will protect my assets. Living trusts will protect your assets from probate, but they do virtually nothing to protect your assets from lawsuits. Other types of trusts—such as charitable remainder trusts, irrevocable trusts, and various offshore trusts—may protect assets from lawsuits. But traditional living trusts (also known as revocable trusts), in which most professionals mistakenly place their hope, do not protect assets.
Solution: As mentioned previously, high-liability professionals should consider using specially drafted asset-protection entities, such as FLPs, to hold title to their assets. The physician’s interest in these entities can then be conveyed to a living trust, ensuring asset protection and probate avoidance.
A physician’s personal assets are never seized. In a recent survey conducted by the National Medical Foundation for Asset Protection, almost 20% of the nation’s physicians had lost personal assets in lawsuits, or personally knew someone who had.
Whereas the public-relations efforts of trial-lawyer associations will continue to claim, “There’s absolutely no proof from any source that any physician’s assets are being seized postjudgment,”2 the findings of this and other surveys directly contradict those assertions.
Solution: Ask your peers in the medical community if they have known of anyone who lost personal assets in malpractice suits. Be aware of the risks. This scenario can and does happen.
Offshore trusts will protect my assets. Be careful. Offshore arrangements range from the highly sophisticated to the dangerous and illegal. Too often, offshore trusts are pitched to the unsuspecting as a way to protect the individual from US income taxes and lawsuits.
In recent years, some very reputable firms, such as KPMG, have been fined by the US Internal Revenue Service (IRS) for promoting tax-evasive offshore trusts and corporations.3 Some clients of these firms have been charged with tax evasion and sued by the IRS for penalties and back taxes.4
As a general rule, if your offshore arrangement evades US taxes, it is illegal. Beginning in 2000, the IRS became increasingly tough on these entities. Furthermore, these offshore plans typically cost between $15,000 and $20,000 to set up and several thousand dollars more each year to maintain. You must have the assets necessary to justify this extreme measure, not to mention a high tolerance for risk.
Solution: Medical professionals who are considering offshore options for their assets need to pay very close attention to domestic and foreign laws. For instance, in the United States, you are guaranteed by law to receive your money no later than 3days from the date of your withdrawal. What are the laws in Bermuda? Or on the Isle of Man?
There are excellent legal instruments that can protect your assets right here in the United States: Nevada Corporations, Delaware Trusts, Alaska Limited Partnerships, Family Limited Partnerships, Children’s Trusts, Charitable Trusts, and so forth. Ask an asset-protection specialist about safe, legal, domestic strategies for asset protection.
More malpractice insurance means less vulnerability to lawsuits. Not necessarily. Whereas it is true that more liability insurance often makes it more difficult to exceed payout caps, necessitating dipping into a physician’s personal assets, larger policies often make malpractice lawsuits more likely to be filed in the first place.
Robert Dowd, JD, a former medical-malpractice attorney, warns, “Larger malpractice policies often act as ‘homing beacons’ for trial attorneys looking for the deepest pockets in which to reach. If you were a lawyer, who would you rather sue for malpractice? A physician with a $2,500,000 policy or one with a $250,000 policy?”
Solution: If you feel confident in your personal and professional asset-protection plans, you may want to meet with an adviser about lowering your insurance coverage. You are unlikely to have many allies in this effort, because hospitals, HMOs, insurance companies, and government agencies all have a vested interest in keeping malpractice coverage as high as possible.
Total asset protection is not possible. Many physicians make this assumption after conversations with ill-informed advisers. It is certainly possible to protect all your assets with the right combination of legal and financial planning.
Solution: There is a new generation of US-based legal structures today that protect against judgments arising from divorces, bankruptcy, and, most important, malpractice lawsuits. Skilled lawyers can provide protection from lawsuits through carefully drafted legal structures.
For instance, a run-of-the-mill FLP drafted by an unskilled lawyer typically includes weak language regarding the right of a controlling partner to withhold income from those who sue the partnership. By contrast, the same FLP powerfully protects assets from a creditor when a skilled attorney uses the following clause: “The general partners may, in their discretion, distribute the profits of the partnership ‘pro rata’ or ‘non-pro rata,’ as they deem advisable.”
In other words, general partners may legally withhold income from plaintiffs or whomever else they please. This means that a plaintiff can sue and win, but will get nothing if you distribute nothing. You have to wonder: If a plaintiff cannot collect a judgment, why would he bother to sue at all? And why would a trial attorney take such a case?
My lawyer and accountant will keep me up to date. Not necessarily. Experts in most areas of civil law will likely not be up to date on emerging procedures in asset protection—and understandably so. According to the legal directory Martindale-Hubble, fewer than 0.001% of the nation’s 1million attorneys claim to specialize in this field. So the chance of your lawyer being an asset-protection authority is not very good.
Solution: Take a proactive approach to protecting personal and professional assets. No one will be more interested in your family’s welfare than you. Learn how to ask the right questions and recognize informed answers. Whereas few physicians have the time or desire to meet with a lawyer to discuss legal protection, the size and frequency of today’s medical-malpractice lawsuits make a basic education in asset protection imperative for today’s physicians.
There are many legal myths that can seriously mislead medical professionals today. Lawsuit protection has become much too important for medical professionals to leave this area to chance. Physicians must realize that they can use the legal system to protect themselves instead of being abused by it. PSP
Scott L. Soelberg, JD, LLM, is an attorney who specializes in lawsuit protection and prevention for physicians and other high-risk professionals. He has personally created hundreds of asset-protection plans. He is a contributing author to the book Cover Your Assets: Lawsuit Protection (Crown Publishing).
G. K. Mangelson, CFP, specializes in medical malpractice protection and prevention. He presents seminars and courses on practice and risk management across the country. He is also a contributing author to Cover Your Assets: Lawsuit Protection.
The authors can be contacted through Michael McCleve at the National Medical Foundation for Asset Protection, (800) 296-7009 or [email protected] This article originally appeared in Orthopedic Technology Review 2005; 7(1):30–31,38.
1. Uniform Law Commisioners. A few facts about the Uniform Faudulent Transfer Act. Available at: http://[removed]www.nccusl.org/nccusl/uniformact[/removed]_factsheets/uniformacts-fs-ufta.asp Accessed February 22, 2006.
2. Quote originating from Illinois Trial Lawyers Association president Michael Schostok. Samuels M. Illinois medical malpractice reform still in flux. Quad City Times. June 20, 2004.
3. Johnson DK. The grand jury is investigating KPMG’s sale of tax shelters. New York Times. February 20, 2004;sect C:5.
4. Tax me if you can [transcript]. “Frontline.” PBS television. February 4, 2004.