Beware: Malpractice lawsuits can derail your nest egg

Lawsuits run rampant in this nation, and that includes those filed against medical practices and physicians. The statistics on medical malpractice lawsuits are sobering. According to Diederich Healthcare’s 2013 Medical Malpractice Payout Analysis, some $3.6 billion was paid out in 2012, and 12,142 total payouts for medical malpractice were made — one every 43 minutes. New York State topped the list for medical malpractice payouts at a whopping $763,088,250 in 2012.

As a physician, you undoubtedly rely completely on your medical malpractice insurance to ensure that your assets are protected. But, if you’re a bit squeamish after reading about those statistics, you might want to take a different approach. In other words, consider giving away your assets via some simple strategies.

Family limited partnerships

One of the most popular asset protection strategies is to establish a family limited partnership (FLP) to hold your bank accounts, stocks, bonds and other assets. In an FLP, you and your spouse are general partners, with complete discretion over how assets and income are distributed.

You and your spouse can take as much as you like for yourselves, but you aren’t obligated to share the wealth with anyone else. And that includes plaintiffs who’ve obtained charging orders through successful lawsuits if the FLP agreement has been written specifically for asset protection purposes.

In addition, such plaintiffs must pay taxes on the “phantom” income they have been awarded. This makes it much less appealing to pursue a lawsuit against a physician who has an FLP in place.

Homestead exemption

Keep in mind that FLPs aren’t a good tool for protecting your home. Mortgage interest deductions, the $250,000-per-spouse capital gains tax exclusion when selling and other tax advantages associated with home ownership aren’t allowed in an FLP.

Fortunately, in most states, you can shelter some or all of your home equity through the state’s homestead exemption. The maximum allowed under such an exemption varies by state, so consult your tax advisor to determine how much of your equity is protected in your state.

If the homestead exemption leaves some of your home equity exposed, consider a personal residence trust. Such trusts protect you from claims against your home without forcing you to abandon your homeowner’s tax advantages.

Offshore trusts

These types of trusts can be good asset protection tools, and can offer significant protection. But they come with their own set of risks — consider carefully where and how such a haven is set up before committing to one. These trusts must comply with the laws in the country in which they’re established, but they also must be structured in accordance with U.S. tax laws and regulations.

U.S. courts may view domestic trusts more kindly, and they’re likely to be less expensive than offshore options. As of now, twelve states have enacted laws that make domestic trusts alternatives to foreign asset protection trusts. While the laws aren’t identical in every respect, they all erect protective fences around the assets of irrevocable trusts.

A caveat

At this point, you might be saying to yourself, “Great! I can implement these strategies. No problem!” But before you run to your legal and financial advisors, remember: You need to have a plan in place before you’re sued. And, it goes without saying, you should do your best to head off lawsuits in the first place.

Don’t wait for an “incident”

If you’ve managed to avoid any medical malpractice lawsuits, bravo! But don’t expect to just sail through life without an incident cropping up. After all, the statistics provided at the top of this article are proof that medical malpractice lawsuits are alive and thriving. •