If you practice emergency medicine long enough, odds are that you will become a defendant in a medical malpractice case. The good news is that the vast majority of medical malpractice claims are either dropped or settled or otherwise resolved before trial. Further, of the small percentage of claims that actually go to trial, approximately 80% draw defense verdicts. Huge verdicts in medical malpractice cases are not common, but they do get an inordinate amount of publicity and create fear in the medical community.
Explore This IssueACEP News: Vol 32 – No 10 – October 2013
Two to five years may transpire from the time that you learn of a suit to the time that it is resolved. During this lengthy period, defendant physicians are understandably anxious about the risk of an unfavorable verdict that far exceeds their insurance coverage. Your own insurer will increase your anxiety by asking you to acknowledge your understanding of the limits of your policy coverage.
Preparing for Bad News
The purpose of this article is to introduce the topic of asset protection. It is a powerful tool that you will probably never need, but having it in place will reduce some of the significant stress of litigation before it may occur. The goal of asset protection is to arrange your assets so that they are safe from malpractice judgment creditors.
Fortunately, federal and state governments have put in place a number of devices that a physician can utilize immediately, so that your financial survival with some assets is possible even if a worst-case litigation scenario occurs.
The Bar Association in your state may also provide some suggestions for attorneys in your area that claim a special interest in asset protection.
Ten Steps to Consider
There is no “one size fits all” plan in asset protection. A plan has to be tailor made to your individual situation in terms of which state you live in, your family situation, the nature and size of your assets, and how much control you are comfortable giving up in order to attain more asset protection. Here are 10 suggestions to consider that may motivate you to learn about your options and discuss them with you family and advisors.
1. Start Early
The ideal time to give asset protection some thought is before you are involved in a lawsuit. In fact, because of the fraudulent conveyance rules, many asset protection programs cannot be instituted if you are already aware of a pending case. Put your plan in action before you become a defendant.
2. Know Thy State
The first step is to learn the basics of this area as the law applies to your particular state. What works well in one state may be worthless in another. Each state has specific laws that protect certain assets from creditors. It makes for dry reading. But learn the rough outline of your state’s bankruptcy laws and what exemptions are allowed (i.e., which assets a person may keep after bankruptcy, such as a principal dwelling). Find out if your state allows an individual a choice between using the Federal or state exemptions or if your state allows the use of only the exemptions unique to your state. Knowing the specific rules of your state is the starting point for any asset protection plan. If you prefer reading a book, Nolo publishes a fine tome titled “How to File for Chapter 7 Bankruptcy,” which includes a clear chart explaining the exemptions for each state. If you prefer reading online, use your favorite search engine and enter the name of your state and the words “bankruptcy exemptions.” If you can scroll past all the ads, you will find some useful information for your state.
3. Seek Wise and Ethical Counsel
This area of the law is not for amateurs. The rules here are complex and very state specific and also subject to change at any time by the state and federal legislature or courts. The fact that changes in the law could instantly render your plan obsolete serves as a powerful argument to opt for simplicity and tradition when developing a plan with your counselor. There are plenty of unethical folks who will play on your fears of losing everything and sell you a pricey plan involving overseas trusts far too complicated for your needs, and that merely substitutes one set of risks for another. In addition, your state of the art cutting-edge plan may become illegal or ineffective in the next session of Congress. Wise and experienced counsel who can devise and monitor your plan is a must. Ask your senior colleagues for suggestions for an attorney who knows this area of the law and who will provide you with the pros and cons of your various options. The Bar Association in your state may also provide some suggestions for attorneys in your area that claim a special interest in asset protection. Interviewing several may be worthwhile since there will be a long-term relationship between you and this firm.
4. Fully Fund Your IRA and Retirement Plans
Determine which IRA and retirement plans you qualify for and fund them to the full extent allowed by law and that you can afford. The benefits of compounding and dividend reinvestment are maximized when such plans are started as early as possible. This is true not just from an income tax and investment perspective, but also because the asset protection benefits are significant. While the specific rules and limits and types of qualifying retirement plans vary from state to state, as a general rule, having assets in retirement plans provide a huge benefit in terms of protecting your nest egg. Learn the specific retirement plans and amounts that your state will allow you to keep safely protected from most creditors.
5. Buy a Home and Build Equity
Homeowners have always been a favored class in the eyes of the legislatures of our country, and this favored status frequently extends into the asset protection field. While the specifics, in terms of the monetary amount and the type of dwelling will vary with each state, the vast majority of states provide some protection from creditors for homeowners. Some states, such as Texas and Florida, are well known for providing great protection for a primary residence. These rules make a compelling case for building up equity in your home. In certain states, such as Michigan, married homeowners are given especially favorable treatment (tenancy by the entirety). Find out what special protections your state gives to homeowners who are in debt, in an effort to keep them in their home. Be aware, though, that such protections from unsecured creditors will not protect your home if you are behind on your mortgage or a home equity loan.
6. Fund Your Child’s Education Early
If you are able to take advantage of your state’s program to fund your children’s college education by starting at an early age, by all means do so – the earlier the better. Learn about the 529 plans available in your state (before you become a defendant). No one can take what you have effectively already spent (in this case, for a worthy cause!)
7. Learn about Trusts
After you take advantage of the simple steps that your state provides for asset protection, you may be in a position to look at more sophisticated options such as trusts. While they are a powerful asset protection tool, trusts do come with expenses and some complications. Trusts are an especially useful tool if you have minor children, as they can provide some degree of financial security to your spouse and/or children if something unpleasant happens to you. Seek an attorney who will educate you about the risks and benefits, and avoid anyone who pressures you to buy an elaborate plan that you do not need.
8. Look at Annuities
Annuities are not an ideal vehicle for most investors. However, many states do provide some asset protection for annuities. The specific level of protection will vary from state to state and this option may be worth exploring depending on which state you live in. If you opt for this option, look for a very low-cost annuity from a well-respected provider.
9. Obtain an Umbrella Policy
While an umbrella insurance policy will generally not help with a medical malpractice case, having umbrella insurance will provide substantial protection at minimal cost in case of a bad outcome in many other types of civil suits ( such as a motor vehicle accident or someone getting hurt on your property). Discuss this with your insurance agent. If you are worried that people hear the word “doctor” and assume that you have deep pockets and a target on your back, then this may help you sleep at night.
10. Don’t put all your eggs in one basket
In an effort to reduce your risk from a civil lawsuit, do not increase the other risks that your investments are vulnerable to. For example, if you are married, do not put all your assets in your spouse’s name. In our society, the likelihood of marital dissolution is at least as likely as a huge malpractice verdict exceeding policy limits. Each family member should have some assets. Do not put all your assets in some complicated expensive overseas trust that was promoted as making you, “judgment proof.”
Conclusion: Prepare Now. Reduce Litigation Stress in the Future
If you are lucky and wise enough to live well within your means, and are able to build up a nest egg, there are legal steps that each state provides to protect your assets from creditors. Learn about the specific options in your state and start by taking advantage of the low risk, simple, traditional and inexpensive options first. If they both match your overall financial goals, and provide some asset protection, then you have an ideal plan. Discuss this topic with your family, your attorney and your accountant and it will greatly reduce your stress should you become a defendant.