Protecting your assets: All plans are not created equal

November 1, 2008

Too many physicians over the last decade have sought cookie-cutter asset protection plans to give them some "peace of mind" that if they ever endure an outrageous malpractice case, they won't lose everything. While we admire these doctors' commitment to pro-actively managing their risk, we have to remind doctors that all "asset protection plans" are not created equal. In fact, many will not even "work" if they ever are relied on.

Too many physicians over the last decade have sought cookie-cutter asset protection plans to give them some "peace of mind" that if they ever endure an outrageous malpractice case, they won't lose everything. While we admire these doctors' commitment to pro-actively managing their risk, we have to remind doctors that all "asset protection plans" are not created equal. In fact, many will not even "work" if they ever are relied on.

Why is this? Essentially, it is because of a basic tenet of asset protection: that any asset protection plan that will truly stand up if challenged must have economic substance. Taken a step further, superior asset protection planning would involve tools that are primarily used by people for non-asset protection purposes. In this way, the best asset protection plan involves tools typically not thought of as "asset protection tools." In other words, "the best asset protection is not asset protection."

Just like tax planning

Simply put, when determining whether a particular transaction with significant tax benefits was an illegitimate tax shelter, the IRS or tax court typically uses a simple test - "Would a taxpayer have done this deal if not for the tax benefit?" In other words, they are asking whether this transaction was simply done to save taxes, or did it have another economic purpose? If there was such a purpose, the transaction stands; if it was only tax-motivated, it fails.

This same test applies when evaluating whether or not a creditor protection tactic will be upheld if ever challenged down the road. Here, the question is, "Did this transaction have an economic purpose, or was it simply done for asset protection purposes?" If you are using tools that millions of Americans use daily for non-asset protection purposes, you can convincingly answer "yes."

Asset protection as a sliding scale

In the three books that either of us has written for doctors, we use a sliding scale approach to evaluate asset protection techniques - with the lowest (-5) being an asset that is completely vulnerable and the highest (+5) being an asset that cannot be taken by a creditor even in bankruptcy. This is important to understand here because every (+5) asset protection technique, whether in a personal or practice implementation, has significant economic benefits to the client, irrespective of asset protection.