Asset protection is one of the most important, if not the most important, financial planning areas for physicians. However, we’ve found that it isn’t a topic that gets enough coverage in the personal finance community and in today’s litigious environment, it is vital that you have an asset protection strategy.
Unfortunately, while it is not a topic that gets enough attention, most of the time when it is discussed the solution tends to be an overly expensive financial product such as an annuity, or permanent life insurance policy, or an expensive and elaborately drawn up trust. Sometimes these products, or estate planning vehicles, are completely appropriate and the best thing for physicians, but often there are other, simple and less expensive ways to accomplish the same objectives.
Here are three financial planning areas that physicians can use today that cost little to nothing.
Title your assets correctly
- Primary residence – Your primary residence is typically best owned in joint names as “Tenants by the Entirety.” This is the default titling for jointly bought homes by married couples in Florida, and the Florida homestead exemption is among the most favorable for asset protection in the U.S., with unlimited creditor protection.
- Investment Accounts – Nonretirement investment accounts, also known as nonqualified accounts, are best owned as “Tenants by the Entirety” for Florida residents. Tenants by the entirety means that because the couple owns an investment account together and it is non-dividable, these assets cannot be separated, and creditors of a single spouse cannot submit a claim on that asset. However, suits that name both spouses would likely be able to name a joint asset as a potential source to settle the liability claim.
- Vehicles – Cars should never be titled in both spouses’ names and instead be in the name of the primary driver of the vehicle. If you are at fault in an accident, the person injured may potentially sue both the driver of the vehicle and the owner of the vehicle. If the vehicle is owned jointly, the individual harmed in the accident could name both spouses and the driver, placing all the assets titled as joint tenants in danger.
Another tilting strategy we have seen is putting investments in the nonphysician spouse’s name. This can also be an effective strategy for marital assets accumulated during a marriage. However, you should use extra caution before using this strategy if you came into the marriage with significant assets, or with anything you may have inherited while being married.
Fully utilize your retirement accounts
Retirement accounts such as 401(k)s and IRAs receive a lot of asset protection. In Florida, 401(k)s and other employer-sponsored retirement plans have an unlimited amount of asset protection, including money rolled over from these plans to a rollover IRA.
Contributory IRAs and Roth IRAs have up to $1 million in asset protection in Florida. To protect more of your assets, you should consider maxing out your work retirement plans and possibly contributing to a Roth IRA. If your income is too high to contribute directly to a Roth IRA, you could use a strategy known as a backdoor Roth IRA.
Have the right insurance
So far, we’ve covered asset protection strategies that cost virtually nothing, but insurance always has a premium cost. However, staying away from the wrong types of insurance and just having the important ones in place are key.
- Malpractice insurance – While sometimes very expensive depending on your specialty, this is your first line of defense in any lawsuit and having this type of insurance is table stakes. According to the American Medical Association (AMA), one in three physicians are sued at some point during their careers. Having this insurance is paramount to limiting your liability within your professional practice.
- Homeowners, auto and other underlying coverages – Malpractice insurance covers your professional liability, but having underlying liability coverage on cars, homes, boats, etc. is important to protect yourself from personal lawsuits. Depending on the insurance, you typically want to have liability coverage of $250,000 to $500,000 per incident. This is not insurance coverage to protect against the loss of one of these assets, it is instead to protect you in case one of these assets results in harm to another person and they sue you.
- Umbrella Insurance – Just as the name states, umbrella insurance sits on top of your underlying auto, home, etc. policies and provides additional coverage. For example, you can buy umbrella policies that provide $1 million, $3 million, $5 million and higher of excess liability coverage. Since these policies only pay out if the settlement is more than your underlying coverage limits, you can usually buy a $1 million umbrella policy for less than $1,000 annually.
Avoid these Insurance/Products:
- Permanent life insurance – These insurance policies are designed to be owned for your entire life. There are several different types, most notably whole life insurance, universal life insurance, or variable life insurance. Since the odds of them paying out at some point are higher (because they are designed to last your entire lifetime), they are much more expensive than term insurance, which is designed to cover you only until you have built up your other assets. While not technically a savings vehicle, often insurance agents recommend these products to protect assets.
- Annuities – These tend to be complex products that are high cost, have long time periods that limit you accessing your money, and have limited investment options. Similar to permanent life insurance, these are protected from creditors, but they tend to be a very expensive and an unnecessary way to protect against lawsuits when there are plenty of alternatives.
If you are meeting with a financial advisor and the first few solutions presented to you are permanent life insurance and annuities, it’s a good idea to get a second opinion. It could save you thousands of dollars up front and tens of thousands of dollars over your medical career.
These are just a few of the basic strategies we’ve used to protect physician’s assets. More complicated financial situations could mean using more complex solutions such as asset protection trusts, Limited Liability Companies (LLCs), or Family Limited Partnerships (FLPs). However, many physicians will find that titling assets correctly, fully utilizing their retirement accounts and having the right insurance are enough to protect their wealth. While no plan can technically be 100% effective, many of these strategies focus on limiting the unprotected assets and maintaining enough insurance to produce a settlement and not further “digging” for assets.