Asset protection for physicians and other professionals is extremely important because of the high risk for lawsuits natural to their profession. A successful lawsuit will gobble up hard-earned assets in short time. But a well-planned asset protection strategy will protect those assets, including the income they generate, from lawsuits and also minimize estate and income taxes.
A solid asset protection strategy goes hand-in-hand with good estate and retirement planning and will involve a combination of domestic asset protection trusts (DAPT), limited liability companies (LLC), revocable living trusts, and insurance trusts.
A water-tight asset protection and estate plan begins with assembling a team of advisors. Each advisor specializes in a particular part of your planning, such as investments, LLC formation, insurance and irrevocable and revocable living trusts. Additionally, having several perspectives of experts in a variety of disciplines ensures the strongest plan possible.
Your team should include at least one of each of the following:
The exact strategy used will vary somewhat for each client, but, generally, my recommended asset protection strategy is to form an LLC and an irrevocable DAPT. The DAPT is made owner of the LLC and ownership of investments and other assets are transferred to the LLC. I prefer to form a client’s LLC and DAPT in Wyoming, Nevada or Delaware because the laws of those states provide better asset protection for physicians and other professionals.
It’s important to note that once asset ownership is transferred to the LLC, the client owns nothing. The LLC owns the assets; the DAPT owns the LLC; and trustee of the DAPT is a trust firm, law firm or similar entity. This is what protects the assets in a lawsuit — since the professional doesn’t own the assets in any way, they cannot be taken in a lawsuit.
However, in this asset protection strategy, the professional still retains control of the assets and any income they generate. This is possible because the professional is named manager of the LLC and beneficiary of the trust. The professional can manage the investments, buy or sell property, and even pay bills using the income or principal of the assets even if they have been sued. This is a perfectly legal arrangement and does not violate any rules or laws, yet it provides excellent asset protection for physicians and other professionals vulnerable to lawsuits.
Revocable living trusts and insurance can also play critical roles in estate planning and asset protection for physicians and other professionals, but I’ll address those components in future posts.