COMMON FINANCIAL MISTAKES PHYSICIANS MAKE
In the medical profession, small mistakes can have grave consequences, so it’s no wonder medical professionals have become a huge target of lawsuits today. Patients and their families have come to expect and feel entitled to receiving perfect medical care. An error that had a catastrophic impact on a loved one means that someone has to pay. It may be because Americans see a lawsuit as a way to “get rich quick” or they just want to get made whole from the wrong they’ve experienced. Either way, they are going after the assets of the physician to pay the price, so it is important for you – as the physician – to be ready when that time comes.
With proper planning and implementation, asset protection may save a business, a partnership, a medical practice and even a marriage. Asset protection attorneys use basic tools such as family limited partnerships (FLP) and limited liability companies. More advanced planning can consist of using non-qualified plans, captive Insurance programs, debt shields and collateralizations strategies. With often over a decade spent in medical school and probably not one class on how to properly plan and manage your finances, insurance, taxes or asset protection, it is imperative that you have the right support team to help put your plan in place. The most important aspect of asset protection is making sure you understand the pros and cons and how each strategy can impact your future. Then, it is imperative that an actual strategy is in place prior to an action leading to a claim being filed.
Who is most likely to come after you?
A. IRS B. Stock Market C. Insurance Risks D. Patients
Answer: All of the above
Since we have no way of determining who will come after you or your practice, it is important that you structure your business and your personal assets with these potential threats in mind. Below are some of the most common mistakes made by most physicians, partnerships and families today that might be avoided with a properly implemented plan.
Not Hiring a Team of Specialists
You have worked hard and have spent a lot of time and money to get where you are today. You are the specialist in your area of practice, but you likely don’t know too much about asset protection. Hire a team of experts that specialize in providing you with the best advice on managing your liability exposure. Your advisory team can explain how each asset protection strategy or tool can be implemented to accomplish your goals and be part of your comprehensive financial plan. Trying to achieve financial success without the right team is like trying to perform surgery alone—it is not done well. Your team should consist of an estate attorney, an asset protection attorney, a CPA, a financial planner, and an investment advisor.
Not Having a Handle on the Current Financial Picture
There are many areas to personal finance so it is important to work with someone that can help you make educated decisions. A common mistake physicians, partners and families often make is mis-managing debt and their cash flow. First, many have no idea what they earn and what they burn. This is why it is so important to have a written statement of net worth as well as a spreadsheet of all of your income and expenses. You should also have an understanding of taxes and how they impact your spending and ways to effectively decrease your overall tax liability. Another area of focus is how to most effectively pass wealth on to the next generation through your estate plan. There are many ways to lose your wealth to taxes and spendthrifts; ensuring you have a plan in place can prove to be the most important way in which to not learn this hard lesson.
Improper Title of Assets
Many physicians think that if they put all of their assets in the name of their spouse or a trust that it can now be exempt from being lost in a law suit. This strategy may not create enough of a barrier around assets and creditors could still get to the assets. Instead you should talk to your estate planning attorney regarding creating and funding a Limited Liability Company, Family Limited Partnership, Qualified Personal Residence Trust or an irrevocable Family Trust. During your lifetime, living trusts provide no asset protection because you are the owner and still maintain full control over those assets. Irrevocable trusts on the other hand can work well for asset protection because you give up control. Every planning technique has pros and cons that should be carefully considered with your financial planner and your attorney prior to putting any arrangements in place.
Putting all your Eggs into one Basket
Holding large concentrated positions in a portfolio is a common problem. Physicians are particularly susceptible to this problem because their knowledge in the medical field often leads them to invest in medical-specific, sometimes risky investments. Similarly, physicians can become over-exposed to medical stocks simply because they have an understanding of the sector. Often medical stocks are more risky because, for example, a news headline can be detrimental to the future of any up and coming medical device or product. Diversification should be a component of every portfolio and implemented to be aligned with reaching financial goals. Other speculative investments can be considered but only with disposable or discretionary income. Beacon Pointe is here to help should you feel your portfolio is not properly diversified.
Not having Adequate Insurance
Not having the proper amounts of insurance coverage can destruct even the most thought out plan. Insurance is often used as the first layer of protection for any financial plan. If a claim is filed, insurance is the first avenue to help your family in an emergency, but it is also where creditors will look to be paid first. With an adequate amount of insurance coverage and properly shielded assets, it may not be worth the creditor’s time or cost to go after your additional assets. Types of insurance that should to be in place are: professional liability, life, long term care, disability, personal liability (umbrella), auto and homeowners insurance.
Not Having Your Assets Protected Before a Claim is Filed
The idea of utilizing any of these techniques for purposes of estate planning or asset protection can work well to prevent creditors from being able to collect on claims. However, it is important that the plan is in place prior to a claim being filed. For instance, it is easier to explain to the court that you transferred your home into the QPRT for estate planning reasons because the transfer took place before your car accident than it is to defend why the transfer of your home to the QPRT wasn’t fraudulent even though it took place after your car accident. Even if you have a potential claim, it may not be too late, just be sure to meet with your attorney as soon as possible to determine if there is any planning that could be done.
There is an abundance of information to be found on how to protect yourself and your practice. Whether you are a physician trying to pay off loan debt or a seasoned physician trying to protect what you’ve earned from taxes, lawsuits or divorce, we all have different challenges. Proper planning prior to having someone file a claim or losing half your income to taxes or divorce is imperative. Work with your team of advisors to ensure your plan fits with your personal and financial goals.
Disclaimer: This has been provided for informational purposes only and should not be considered as investment advice or as a recommendation. Beacon Pointe does not endorse and is not responsible for the content, product, or services of other third party sites or references. Beacon Pointe does not offer legal or tax advice. Private legal counsel alone may be responsible and relied upon for these purposes. Only private legal counsel may recommend the application of this general information to any particular situation or prepare an instrument chosen to implement the design discussed herein. CIRCULAR 230 NOTICE: To ensure compliance with requirements imposed by the IRS, this notice is to inform you that any tax advice included in this communication, including any attachments, is not intended or written to be used, and cannot be used, for the purpose of avoiding any federal tax penalty or promoting, marketing, or recommending to another party any transaction or matter.