You’ve worked too hard to become a cautionary tale

Fair or not, physicians will spend much of their lives with a target on their back—and we’re not just talking about the risks of being sued for medical practice (which are one in three, in case you’re wondering).

Physicians, by virtue of their profession, are perceived as financially robust individuals. This perception often makes them prime targets in legal disputes extending far beyond the confines of their professional responsibilities.

These risks can emerge even from relatively mundane activities like hosting a party or driving a car. A minor fender bender can escalate into a significant legal challenge if the parties involved recognize the physician’s professional status (Beware of that “MD/DO” sticker on your license plate).

Many physicians are justifiably preoccupied with whether their medmal insurance is sufficient, failing altogether to protect themselves against alternative risks. Others are vaguely aware of their exposure but have yet to take action to protect themselves. In one survey, 21 percent of wealthy individuals reported carrying no umbrella insurance at all. Another 40 percent said they were carrying less than $5 million in liability insurance.

Below, we delve into the nuances of asset protection for physicians, exploring strategies that range from essential insurance policies to sophisticated legal structures. Protecting what you’ve worked tirelessly to build is not just a financial imperative; it’s a crucial aspect of maintaining your peace of mind as a healthcare professional.

Obligatory disclaimer about the importance of your marriage

Read almost any guide to asset protection for physicians, and you will see the number one strategy is “date night,” i.e., ensuring that you have a healthy marriage and avoid divorce.

A 40-year study revealed couples with at least one physician have a divorce rate of 32 percent, with rates by specialty varying widely (for psychiatrists, it’s 51%). The fact that the rate is lower than the overall population might come as cold comfort—it is still a one in three chance, and you can bet that disagreements over money and assets take a central role in divorce proceedings.

The White Coat Investor claims that of 1,000 situations in which a physician loses money to another person, 999 of them were during a divorce.

What they didn’t mention is that “Date Night” is not exactly a sufficient strategy for protecting your marriage. Instead, we recommend being aware of what the data shows:

• Physicians who get married before medical school graduation have a higher divorce rate than those who wait until after graduation (33 percent versus 23 percent). Wait until you graduate!
• Female physicians are one and a half times more likely to be divorced than male physicians. Women who worked longer hours were even more likely to be divorced, whereas the correlation went the opposite direction for male doctors.
• Depression among certain physician specialties contributes to the divorce rate—psychiatrists in particular report high rates of depression, which may impact their marital relationships. Surgeons are the second-most prone specialty to divorce.

Additionally, anger, stress, poor work-life balance, and even the quality of your relationship with your parents all correlate with higher divorce rates among physicians. None of this is exactly surprising, but it is somewhat overlooked.

First Line of Defense: Umbrella Insurance

After looking after your marriage, the next most important strategy—the first line of defense—for asset protection is umbrella insurance.

This type of insurance provides an essential safety net, extending liability coverage beyond what is typically offered by standard auto or homeowner’s insurance policies. In a profession like medicine where personal liability risks can arise unexpectedly, umbrella insurance offers a robust shield against potential financial devastations.

How umbrella insurance works

Umbrella insurance provides coverage when the limits of other policies are exhausted. It covers claims excluded by other liability policies. Coverage typically includes protection against claims arising from injuries, property damage, certain lawsuits, and personal liability situations, such as slander, libel, or mental anguish.

Umbrella insurance typically does not cover damage to personal property or protect you against liability from intentional harm or criminal actions.

Costs and how much coverage you should get

The cost of umbrella insurance varies based on coverage amount and factors like location and types of assets owned, as well as other risk factors (i.e., trampolines, pools, even pets). Coverage is usually available in million-dollar increments from $1 million to $5 million and is usually relatively affordable, with average costs ranging from $150 to $300 per year for $1 million worth of extra protection.

Physicians are advised to secure at least a few million dollars in umbrella coverage, though it should be noted many states have passed limits on how much one can buy (in fact, all tort law is state-specific).

Asset Protection by Proxy

The next best strategies for asset protection involve ensuring you don’t actually own the assets. Here is where things get more complicated.

Physicians should always consult a financial advisor to get strategies customized for their needs and those of their families (Core has teamed up with a trusted partner and financial advisor in GenFi. If you have any questions we highly recommend scheduling a complimentary consult with founding partner Ben Yin)

Spousal Transfer: Transfer assets to a spouse who is less likely to face professional liability. This is often used in cases where one spouse is at a higher risk of being sued due to their profession. However, be aware of this strategy because a spouse could easily get sued in a car accident.  Or in the case of divorce, they could walk away with the majority of assets.

Irrevocable Trusts for Family Members: Establish an irrevocable trust with family members (such as children or parents) as beneficiaries. Once assets are transferred into the trust, they are no longer under the control of the original owner.

Gifting Assets: Directly gifting assets to adult children or other relatives. This removes the assets from the individual’s estate, although it can have tax implications.

Family Limited Partnerships (FLPs): Involves transferring assets into a partnership, with family members holding shares in the partnership. Control can be maintained through general partnership while protecting the assets from personal creditors.

Children’s Trusts: Establish a trust specifically for the benefit of children, which can also serve as a means of asset protection. These can be either irrevocable or revocable, depending on the desired level of protection and control.

Asset Protection Trusts in Other Jurisdictions: Establishing trusts in jurisdictions with favorable asset protection laws, naming family members or trusted individuals as beneficiaries.

Equity Stripping: Transfer equity from assets (like real estate) to others through mechanisms like loans, liens, or mortgages, making the asset less attractive to creditors. Laws vary state by state.

Creating Holding Companies: Transferring assets to a holding company controlled by trusted individuals or family members.

It’s important to note that while these strategies can offer protection, they also come with various legal, financial, and tax implications. Professional advice from a financial advisor is crucial when considering these options to ensure compliance with laws and regulations and to understand the full impact of such transfers.

Next Best Strategies

Tenants by the Entirety

Tenants by the Entirety is a form of joint ownership available to married couples, offering a unique layer of asset protection. In this arrangement, creditors cannot pursue the property for debts owed by one spouse alone. This legal framework treats the couple as a single legal entity, meaning assets owned under Tenants by the Entirety are protected from individual liabilities, making it a strategic choice for married physicians.

Retirement Accounts

Retirement accounts, such as 401(k)s and IRAs, provide significant asset protection benefits. Under federal law, these accounts enjoy protection from creditors in bankruptcy scenarios, with certain limitations. For example, as of 2021, ERISA-qualified retirement plans have unlimited protection, while IRAs and Roth IRAs are protected up to $1,362,800 (this amount is subject to periodic adjustments). Physicians should consider maximizing contributions to these accounts for both retirement savings and asset protection.

Whole Life Insurance

Whole life insurance policies offer more than just a death benefit; they can be a strategic part of asset protection. The cash value of whole life insurance is generally protected from creditors in many states, making it a dual-purpose financial tool. It not only provides financial security for the policyholder’s family but also serves as a safeguard for a portion of the physician’s assets.

Annuities

Annuities are another financial product that can offer asset protection. Many states provide significant creditor protection for annuity contracts, especially those intended for retirement. The level of protection varies by state, but in general, funds held in annuity accounts are often shielded from lawsuits and bankruptcy, presenting an attractive option for physicians looking to protect their assets.

Stealth Wealth: live modestly & focus on our healing mission

Finally, consider one of the simplest strategies: living modestly.

Besides allowing you to accumulate wealth even faster by focusing on savings, the concept of Stealth Wealth involves maintaining a low profile about one’s financial status, and avoiding overt displays of wealth.

This practice is not just about privacy; it’s a strategic move to reduce the likelihood of being targeted in lawsuits or falling prey to financial predators. By avoiding flaunting wealth, physicians can minimize the perception of being ‘deep-pocket’ targets.

Moreover, this approach dovetails with the core values of many physicians – to focus on their healing missions rather than the visual trappings of success.

The ethos of Stealth Wealth encourages living a life that prioritizes personal fulfillment, professional dedication, and family well-being over material ostentation. It’s about making financial decisions that reflect and support their roles as caregivers and community members, rather than as wealthy targets.

For more individualized advice on how to protect your assets and build generational wealth, we very much encourage you to ask your CPA or schedule a complimentary 30-minute session with GenFi founder Ben Yin.