Few financial advisors can properly communicate what asset protection actually means to their dentist clients, or more importantly, how dentists can fold it into their financial planning without significant expense or inconvenience.
Asset protection is a concept with which many advisors struggle. Despite its popularity in the medical community, few advisors can properly communicate what asset protection actually means, or more importantly, how dentists can without significant expense or inconvenience.
Simply put, asset protection is the mindfulness of an advisor to establish barriers against the future claims of potential, unknown creditors. There are two primary ways to accomplish this feat. The first is through insurance. By accepting a small, known, and present loss in the form of an insurance premium, the doctor is able to protect against a potentially large and unknown loss later. The second way is by shifting control of assets away from the doctor, which insulates the assets from being used to satisfy any unknown future claims.
Here are three things most doctors can do that will provide a significant amount of protection without breaking the bank.
Bring your umbrella
The most important thing any doctor can do to protect assets is to be properly insured. An umbrella policy is a vital part of any insurance plan, and it protects in two ways. First, it provides additional liability coverage above the limits of homeowners and car insurance policies. An umbrella policy is designed to kick in when the liability limits on these other policies have been exhausted and the doctor would be exposed to creditor claims. Second, an umbrella policy can protect against hazards that are not typically covered under traditional liability policies, such as false arrest, libel, slander, and liability coverage on home rentals.
As a general rule, we recommend $3,000,000 of coverage. This should be increased when a doctor has nonqualified assets in excess of the coverage amount. While the coverage amount can seem very high, the costs of these policies are fairly nominal due to the fact that the policy pays only when traditional liability insurance is exhausted. In fact, many doctors are able to fully neutralize any increased premiums when adding an umbrella policy by increasing the deductible on their auto and homeowner insurance policies.
More than a retirement plan
Most doctors contribute to retirement plans for reasons other than asset protection. These plans, which allow for tax-deductible contributions and tax-deferred compounding of investment returns, also offer tremendous asset-protection benefits. All qualified retirement plans provide complete protection from a broad array of creditor classes, including malpractice creditors and bankruptcy creditors. Note that this does not include SIMPLE-IRAs or SEP-IRAs, which, while offering a great deal of protection, are not fully protected like ERISA plans.
The maximum funding of a doctor’s retirement plan is an essential component of any asset protection plan since it allows the doctor to completely protect assets in the present while allowing him or her to personally benefit from the assets in the future.
Make your LLC an FLLC
Many doctors own office buildings inside of an LLC. With a little planning, a doctor can make an ordinary LLC for real estate a Family Limited Liability Company (FLLC). (For more info on what an FLLC is, see our article from July 2015 Dental Economics).1 As a general rule, creditors cannot reach the assets within the partnership, nor can an LLC be dissolved due to a suit against an individual partner. Rather, an individual creditor is restricted to obtaining a “charging order” against the doctor’s partnership interest.
As a result, the individual creditor can only obtain access to funds from the partnership to the extent of the distributions. If the doctor’s creditor attaches his or her interest, the creditor may have to pay taxes on income earned by the partnership, whether or not it is distributed. Since the doctor (as general partner) can control whether income is distributed or retained, a “charging order” is more often a burden rather than a benefit for a creditor. Due to a multitude of issues, it is best to consult with a professional before using this strategy.
1. McGill J, Tucker A. 4 reasons to turn your office building LLC into a family LLC. Dental Economics website. http://www.dentaleconomics.com/articles/print/volume-105/issue-7/money/4-reasons-to-turn-your-office-building-llc-into-a-family-llc.html. Published July 2015. Accessed February 23, 2017.
Andrew Tucker, JD, CPA, CFP, and John K. McGill, JD, MBA, CPA, provide tax and business planning for the dental profession and publish the McGill Advisory newsletter through John K. McGill & Company Inc. The McGill & Hill Group LLC is a one-stop resource for tax and business planning, practice transition, legal, retirement plan administration, CPA, and investment advisory services. Visit mcgillhillgroup.com.