You probably know that the practice of medicine is a profession fraught with the risk of liability. It’s not just medical malpractice claims either (although those are certainly scary enough). It’s the entire scope of risk from being in business, including employment-related issues, careless business partners and employees, and contractual obligations, as well as personal liabilities. Unfortunately, in our litigious society, these liability risks are not unique to physicians, although physicians are a frequent target.
Below are three liability planning tips for physicians to protect their hard-earned money.
Tip #1 – Insurance is Always the First Line of Defense Against Liability
Liability insurance is the first line of defense against a claim. Liability insurance provides a source of funds to pay legal fees as well as settlements or judgments. Types of insurance you should consider are:
• Homeowner’s insurance
• Property and casualty insurance
• Excess liability insurance (also known as “umbrella” insurance)
• Automobile and other vehicle (motorcycle, boat, airplane) insurance
• General business insurance
• Professional liability insurance
• Directors and officers insurance
Tip #2 – State Exemptions Protect a Variety of Personal Assets from Lawsuits
Each state has a set of laws and/or constitutional provisions that partially or completely exempt certain types of assets owned by residents from the claims of creditors. While these laws vary widely from state to state, in general, the following types of assets may be protected from a judgment entered against you under applicable state law:
• Primary residence (referred to as “homestead” protection in some states – in Massachusetts, the recording at the Registry of Deeds of a Declaration of Homestead provides $500,000 of equity protection)
• Qualified retirement plans (401Ks, profit sharing plans, money purchase plans, IRAs)
• Life insurance (cash value)
• Property co-owned with a spouse as “tenants by the entirety” (only available to married couples; in Massachusetts this only applies to your primary residence)
• Prepaid college plans
• Section 529 plans
• Disability insurance payments
• Social Security benefits
Tip #3 – Business Entities Protect Business and Personal Assets from Lawsuits
Business entities include partnerships, limited liability companies, and corporations. Physicians who are business owners need to mitigate the risks and liabilities associated with owning a business, and real estate investors need to mitigate the risks and liabilities associated with owning real estate, through the use of one or more entities. The right structure for your enterprise should take into consideration asset protection, income taxes, estate planning, retirement funding, and business succession goals.
Business entities can also be an effective tool for protecting your personal assets from lawsuits. In many states, in addition to the protections offered by incorporating, assets held within a limited partnership or a limited liability company are protected from the personal creditors of an owner. In many cases, the personal creditors of an owner cannot step into the owner’s shoes and take over the business. Instead, the creditor is limited to a “charging order” which only gives the creditor the rights of an assignee. In general, this limits the creditor to receiving distributions from the entity if and when they are made.
Final Advice for Protecting Your Assets
Liability insurance, exemption planning, and business entities should be used together to create a multi-layered liability protection plan. Our firm is experienced with helping physicians, professionals, business owners, board members, real estate investors, and retirees create and—just as important—maintain a comprehensive liability protection plan. Please call our office if you’d like to make sure you have the right protection in place.
This post is for informational purposes only and is not intended to be construed as written advice about a Federal or state tax matter. Readers should consult with their own professional advisors to evaluate or pursue tax, accounting, financial, or legal planning strategies and should not rely on the information in this post.