These three asset protection tips can help physicians, business owners, and other professionals protect their assets from various types of creditors. Whether you are a physician or not, you probably know that the practice of medicine is a profession fraught with liability. It’s not just medical malpractice claims either – employment related issues, careless business partners and employees, departing partners who believe they built the business, contractual obligations, premises liability that comes with real estate ownership, and personal liabilities unrelated to professional endeavors, add to the risk assumed by physicians, professionals and business owners.
Unfortunately, in our litigious society, where everyone wants to blame someone else for their mistakes and failures, these liability risks are not unique to physicians. Business owners, other professionals like architects, engineers, accountants and (egads!!) lawyers, board members, real estate investors, and retirees all need these asset protection tips because of a variety of liabilities that can and do arise.
Below are three asset protection tips anyone – physicians and non-physicians alike – can use to protect their hard earned money and the assets they have accumulated through years of blood, sweat and tears.
Tip #1 – Insurance is the First Line of Defense Against Liability
Liability insurance for asset protection should be the first line of defense against a claim. Liability insurance provides a source of funds to pay legal fees as well as settlements or judgments. Types of insurance you should have in place include (as applicable):
- Homeowner’s insurance
- Property and casualty insurance
- Excess liability insurance (also known as “umbrella” insurance)
- Automobile and other vehicle (motorcycle, boat, airplane) insurance
- General business insurance
- Professional liability insurance
- Directors and officers insurance
Acquiring and maintaining umbrella liability insurance for asset protection is one of the most important foundations for asset protection purposes in our current legal environment. When an accident occurs on real property (premises liability) you own, or when an automobile accident occurs causing injury to a third party, the personal injury lawyers come out of the woodwork. A good umbrella liability policy will allow you to escape a ruinous judgment, and the sometimes incredible expense of defending yourself from an exaggerated injury. Usually in these cases, the actual damages to the injured party are negligible, if even noticeable.
For liability insurance for asset protection to be successful, you must notify your insurance company of any and all changes in circumstances. In one case with which we are familiar, our client lived in his home and had more than adequate liability insurance, including a $3 million liability umbrella policy. He built a new personal residence next door to the original home and moved into the new home. He rented out the old home. He failed to notify the insurance company that he was no longer living in that home. A guest of a tenant for the now rental house was seriously injured. The insurance company denied liability for both the homeowners policy and the umbrella liability policy. The denial was based on the fact the home had been converted from primary residence to rental home, without notice to the insurance company. Our client was left to defend the claims of the injured party at great cost to himself. He had no liability coverage to cover the loss of $3.2 million.
The moral of that story, maintain your liability insurance, and keep the insurance company aware of any changes in circumstances that might affect your coverage.
Tip #2 – State Exemptions Protect a Variety of Personal Assets From Lawsuits
Each state has a set of laws and/or constitutional provisions that partially or completely exempt certain types of assets owned by residents from the claims of creditors. While these laws vary widely from state to state, Florida is one of the more generous states where creditor exempt assets are concerned. In general, the Florida statutes, and the Florida Constitution, the following are creditor exempt assets that cannot be seized to pay judgments entered against you under applicable Florida law:
- Primary residence (referred to as “homestead” protection in the Florida Constitution – for an unlimited value, unless you end up in bankruptcy court where the limit is $1,000,000 as adjusted for inflation)
- Qualified retirement plans (401Ks, profit sharing plans, money purchase plans, IRAs)
- Life insurance (cash value and death benefit)
- Annuities (cash value and death benefit)
- Property co-owned with a spouse as “tenants by the entirety” (available to married couples; includes real property,
- Personal property including bank accounts, brokerage accounts, and other types of personal property so long as it is titled as tenants by the entirety)
- Wages (up to 6 months in a designated “wage account”)
- Prepaid college plans
- Section 529 plans
- Disability insurance payments
- Social Security benefits
In addition to the fraudulent conveyance statute, Florida has a fraudulent conversion statute. The fraudulent conveyance statute says that if you transfer assets to a third party, for less than fair market value consideration, at a time when you have creditor claims pending against you, you have committed a “fraudulent conveyance.” The court can unwind a fraudulent conveyance which allows your creditors to follow those transferred assets into the hands of the third party to whom you transferred the assets.
The fraudulent conversion statute says that you have the same problem if you transfer assets that are not exempt from creditor claims into assets that are creditor exempt assets, then the third party creditor has the right to undo the conversion of the previously non-exempt assets. The creditor can then claim those assets to satisfy a judgment against asset.The fraudulent conversion statute only applies if the conversion of the assets was for the purpose of delaying, hindering, or defrauding, a creditor. The fraudulent conversion statute does not apply if there is a bona fide reason for converting the asset other than delaying, hindering or defrauding a creditor.
For instance, one of our clients several years ago, who was 82 years old, had an automobile accident for which he was charged with causing. He owned his condo and several hundred thousand dollars in a brokerage account. He was in a second marriage. His decisions with regard to his employer’s pension plan were made before his current marriage, when he was a widower. He was required to take his pension plan base only on his life. As a result, when he died, his current wife would not be entitled to any of his pension check, which was their primary source of income. After the accident, we consulted with a Certified Financial Planner (CFP) who recommended, in writing, that the client use much of his available funds from his brokerage accounts to purchase an annuity, so that upon his death, his wife will have sufficient income. The client purchased an annuity for approximately $250,000. The transaction was attacked by the injured party in the automobile accident. The transfer was determined not to be a fraudulent conversion because the primary reason for the transfer of the assets was determined to be a bona fide need to provide retirement income to the client’s spouse after his death.
Tip #3 – Business Entities Protect Business and Personal Assets From Lawsuits
Business entities including partnerships, limited liability companies, corporations, and various types of trusts, including domestic asset protection trusts, spousal lifetime access trusts (SLATs), the Florida land trust, and many other types of trusts and business entities. Business owners need to mitigate the risks and liabilities associated with owning a business, and real estate investors need to mitigate the risks and liabilities associated with owning real estate, through the use of one or more entities. The right structure for your enterprise should take into consideration asset protection, income taxes, estate planning, retirement funding, and business succession goals.
Business entities can also be an effective tool for protecting your personal assets from lawsuits. In many states, assets held within a limited partnership or a limited liability company are protected from the personal creditors of an owner. In many cases, the personal creditors of an owner cannot step into the owner’s shoes and take over the business. Instead, the creditor is limited to a “charging order” which only gives the creditor the rights of an assignee. In general this limits the creditor to receiving distributions from the entity if and when they are made. With the proper language contained in the limited liability company’s operating agreement, or the partnership agreement for a general or limited partnership, the charging order remedy can be a very effective asset protection tool. Florida statutes provide that the charging order is the exclusive remedy available to creditors of those who own ownership interests in limited liability companies and limited partnerships established in Florida.
The charging order remedy is a most effective procedure for asset protection using legal entities. One of our clients and his wife were facing personal bankruptcy. The wife owned a partial interest in a corporation that owned her family’s business for decades prior to the evolving situation. Knowing that in a bankruptcy proceeding her interest in the corporation would be seized by the trustee in bankruptcy and liquidated to pay her and her husband’s creditors. After consulting with her siblings, we converted the corporation into an limited liability company (LLC) in a tax free reorganization. Under Florida law the conversion of the corporation to an LLC was retroactive back to the initial formation of the corporation. Similarly, Florida law provides that the charging order remedy is the exclusive remedy against the ownership interest of an LLC. The bankruptcy trustee was not able to take possession or ownership of the wife’s interest in the family business and she was able to retain it’s full ownership and value throughout the bankruptcy proceedings and continuing after the discharge from the bankruptcy court.
Final Advice for Protecting Your Assets
Asset protection planning is not simple. Depending on the nature of your assets, the activities in your business enterprises, the value of your assets, and the exposure you may have to third parties, asset protection planning can become quite complex. Liability insurance for asset protection, exemption planning, and business entities, including different types of trusts, should be used together to create a multi-layered liability protection plan. Our firm is experienced with helping physicians, business owners, board members, real estate investors, and retirees create and—just as important—maintain a comprehensive liability protection plan. For over 10 years we served as the director of asset protection planning for the Florida Physicians Association. Our physician clients are located all over the State of Florida. Many others of our clients have survived the vagaries of their professions and business enterprises from liability issues through asset protection planning that we have recommended and implemented for them, including real estate developers, real estate investors, engineers, architects, lawyers, transportation companies and businesses with trucks traveling the roads of Florida and other states. We know asset protection in Florida.
Please call our office to schedule an asset protection consultation so we can help you protect your assets.