The Golden State is a great place to live, and a great place to practice medicine too. However, it can be challenging for California doctors to turn their income into lasting wealth. And there are some risks and pitfalls standing in the way. In this article we’ll discuss ways to reduce or avoid risks to your hard-earned wealth.
The biggest risks doctors face
As wealth advisors to many California doctors, we deal with all types of risk. Financial risks are real for physicians and need to be addressed in their personal financial and business planning. Physicians also face the “human” risk that their income may be interrupted by burnout, disability, or death. But when asked what really keeps them up at night, physicians will often point to the risk of being sued.
The degree to which legal liability is a threat to a physician depends on their specific circumstances. According to the AMA, a third of physicians will face a malpractice lawsuit at some point in their careers. Physicians also face the risk of legal action from business, employee, or personal lawsuits. Even doctors who have not amassed much wealth yet are at risk: their future earnings can be attached in a lawsuit or judgement.
Asset protection in California
California’s legal structure can be challenging for those seeking asset protection. Exempting assets from legal liability can have a limited effect due to state exemption caps. Putting everything in your spouse’s name may also be ineffective, as California is a Community Property state. In fact, any strategy to transfer assets out of your name could be ineffective if it’s done after legal troubles have already started brewing.
When it comes to devising a plan for legal protection, the strategies involved can range from simple to very complex. Some can cause unintended consequences, and so it’s important to weigh the trade-offs. Consultation with a legal professional is often needed. Fortunately, there are some very effective measures you can take without it costing a bundle or taking away too many of your options.
Insurance — the first line of defense
Insurance is an essential tool in any asset protection plan. It protects by transferring liability for a risk to the insurance company.
Professional liability insurance
Malpractice insurance is the best defense against claims arising from patients. Group practices typically arrange and pay for malpractice policies for their physicians. Yet, there may be significant exclusions such as for claims arising after the physician leaves the practice.
There’s good news for California doctors purchasing their own malpractice insurance. Premiums are lower thanks to state mandated litigation caps, and there are a lot of carriers to choose from. Compare the carrier’s financial strength and claims experience. Also consider their history of defending cases in your specialty. Self-employed physicians also need to protect against general business liability and employee claims.
Personal liability insurance
Personal liability is probably a bigger threat to physicians than malpractice litigation. It’s essential for any highly paid professional to have adequate personal liability insurance. Standard auto and homeowners’ policies typically aren’t enough. You’ll likely need to add an umbrella liability insurance policy.
When choosing personal liability insurance, consider the carrier’s financial strength and claims experience. Make sure the umbrella policy coordinates with the underlying auto and homeowner’s policies. You don’t want to have gaps between the two that could leave you potentially uncovered.
Retirement savings with built-in protection
A very effective asset protection measure is to save money in Qualified Retirement Plan accounts such as 401(k)s, 403(b)s, and 457s. These have built-in asset protection thanks to their federal government charters. In California and most other states, money in Qualified Retirement Plan accounts is protected from lawsuits, creditors, and bankruptcy.
Qualified Retirement Plan accounts also offer great tax benefits. You can deduct contributions from your taxable income, and investment income and growth are tax-deferred as well. These tax benefits make Qualified Retirement Plans excellent retirement savings vehicles as well as excellent asset protection measures.
Group practices typically offer at least one Qualified Retirement Plan option. Self-employed practitioners can establish their own plans, and while there are strict IRS and Department of Labor rules to adhere to, they can be very inexpensive and simple to maintain.
Entities and legal structures
Entities like corporations and Limited Liability Companies work by segregating assets to limit what a creditor can go after. Incorporating your practice separates it from its principals’ personal assets- as long as you truly operate it as a separate entity. Limited Liability companies are simpler, but California limits the use of LLC and LLP entities for medical practices. Choosing the right legal structure for your practice can also have implications for taxes and for growth down the road.
Physicians may seek to use broad legal structures like Asset Protection Trusts to protect all their personal and business assets. These can also have long-lasting implications beyond asset protection. They can be very costly to implement and maintain and can have tax consequences. They can also limit the control you have over the assets, potentially affecting your quality of life.
Tying it all together
Clearly, doctors face many challenges that can put their personal wealth at risk. Asset protection planning is important, yet the strategies you employ can have implications for your practice, your personal life and your family. That’s why asset protection should be considered as part of your overall financial plan.
At Blankinship & Foster, we help doctors like you build a comprehensive wealth plan and we help you take the action steps to put it into motion. We help doctors build, grow and protect wealth for their families. Please contact us to learn more and to schedule a complementary consultation.