The Deep-Pocketed Defendant: How Insulated Are Your Assets?
With so many litigation horror stories these days, you can’t really blame healthcare professionals for being a bit paranoid. Consider these possible scenarios:
- An OB/GYN is successfully sued in a "bad baby" case. The $4 million judgment tops her $2.5 million malpractice coverage, and the plaintiff’s attorney quickly slaps a lien on $1.5 million of equity in her home.
- A practice office manager prevails in her wrongful termination lawsuit when it became clear that her firing was in retaliation for spurning the unwelcome advances of a partner. Now all of the practice owners are on the hook for damages
With stories like this, it’s no wonder physicians lose sleep wondering when the process server will show up at their doorstep.
It’s Nothing Personal
The simple reality is that litigants – whether a divorce attorney or a litigious ex-employee – search for defendants who can pay. The scary part is that it’s not all that hard to find out what is in your practice’s pockets.
Utilizing a network of publicly available sources and entirely legal techniques, attorneys can map out your assets and income. Even when no assets are found, physicians are often targeted due to their capacity to earn income.
Asset Protection 101
Asset protection is based on a simple concept: disassociating you from your assets and income sources. This is typically achieved by shifting income and assets away from the professional practice, where they are vulnerable, and toward another entity, which is privately controlled.
In the case of personal assets such as land, cars, planes and brokerage accounts, a variety of asset-shifting strategies can be employed to either isolate these assets from hostile creditors or at last make them less appealing to go after. (See page 3 for more details.)
Different assets have different levels of risk attached to them. So the first step is to determine the risk your assets face of being seized through any of the following methods:
Office lawsuits – There are plenty of potential lawsuits lurking around your practice, including:
- Sexual harassment
- Wrongful termination
- Breach of contract
Malpractice –Malpractice actions (rightfully or wrongfully) are brought every day. Depending on the case and the jury, a judgment may well exceed your malpractice coverage.
Practice real estate – If you own a medical office building in your name, a victorious plaintiff could claim it.
Divorce – Many doctors transfer assets to a spouse as part of an asset-protection plan. However, doing so may place you in a vulnerable position if the marriage fails.
Segregate Practice Assets
Segregate Practice Assets
In the case of a medical practice, separate entities may be formed to segregate real estate – such as a medical office building – and expensive equipment owned by the practice. Legally, an LLC can own real estate (like an office building) and rent it back to the medical practice. This shields the building from any liability that arises outside of the LLC.
Beyond physical assets, it’s also critical to protect your practice’s accounts receivable. A wrongful act of a single partner can actually threaten all of the AR in a typical practice. Protection strategies include taking out a loan collateralized by the AR or purchasing a cash-value life insurance policy funded by the proceeds of the AR. In the case of a loan, the bank will have first lien against the receivables, protecting them from creditors and litigators.
Protect Personal Assets
Once the practice itself is protected, the personal assets of individual physicians in the practice should be shielded. Here, one or more LLCs can be established, or physicians can opt for an irrevocable trust to hold the assets.
Also, qualified retirement plans such as 401(k)s, SEPs and Simple IRAs are generally off limits to creditors. The key is to make sure that such plans fully comply with federal Employee Retirement Income Security Act (ERISA) regulations. Note, however, that retirement plan assets may be vulnerable in situations of divorce.
Another advanced strategy involves forming a captive insurance company. Here, practice owners create a licensed insurance company to insure against potential liabilities of the practice. For further protection, a trust may be established to own the company.
Before the Lightning Strikes
A final key component of asset protection is the need to create your plan beforeany claim against your assets is made or litigation is threatened.
In general, the courts will not recognize protective moves made in anticipation of litigation or action by creditors. The key is to have a plan in place before the lighting strikes.
Healthcare Practice Strategies - Summer 2016