Did you know?
- 58,565 non-federal physicians in the State of Florida as of December 31, 2007.
- 783 medical malpractice claims filed in Florida in 2007.
- $289,256 the average claim payment in 2007.
(source: State of Florida)
Physicians are open to self inflicted liability and practice inflicted liability. The first defense is insurance. Physicians have many different options, often expensive and limited. With increasing cost of protecting assets, physicians might review the above numbers and take a simple approach. Some even decide to go towards self insurance as allowed by Florida Law.
Physicians can use some basic asset protection tools that can be used for multiple purposes.
Asset Protection Tools
One basic strategy is to use multiple entities to reduce liability. For example, use one entity for the medical practice itself and a separate entity to hold real estate and then lease the real estate to the practice group. Physicians might consider not allowing the medical practice to own patents and any other intellectual property. Entities should generally be limited liability companies because they generally provide the best asset protection, and they provide flow-through tax treatment.
The use of irrevocable life insurance trusts (ILIT) often used for estate planning can provide some protection. With the proper structure the (ILIT) would provide death benefits that are protected from creditors. In addition, cash value life insurance policies often provide the same type of protection. Another estate planning tool that can offer protections is the Family Limited Partnership. These structures can shield an asset by limiting the creditor’s ability to link the asset directly to the physician or his/her practice.
Strategies using qualified retirement plans should also be considered. Plans like the 401(k), IRA and non qualified deferred compensation plans no only have tax benefits, but when structured correctly offer protection against lawsuits and creditor claims.
Advanced Tools using Accounts Receivable Financing
A more specific option offered to physicians is account receivable financing. This is often offered as a tool that offers asset protection and converts assets into one that yields returns. However, many advisors pitch this plan with more motivation in selling insurance.
The basic concept is simple. The physician will borrow money and the lender places a UCC1 which creates a lien on the accounts receivable. This will put creditors in a second position behind the lender. Then, the proceeds from the loan are deposited into a single premium immediate annuity, which will then pay into a life insurance policy. In theory, the cash value of the insurance policy will then be used when the physicians retires by allowing the physician to borrow from the policy as a tax free loan.
The physicians should be aware of some flaws of this plan. They should ask if the interest of the loan is deductible. This is an important consideration since this could seriously impact the validity of using this approach. How the physician will pay off the loan? For example, if physicians use the account receivables that are taxable, it might not be enough to pay of the loan. In addition some advisor might show illustrations that show short term financing rates for long term goals.
If done correctly asset receivable financing might make sense. Success of this plan requires proper set up of borrowing, interest rates staying low, and the life insurance policy having good returns.
What is Captive Insurance?
The use of Captive Insurance Company (CIC) can provide multiple benefits to the physicians. CIC is a legal entity formed either in the U.S or foreign jurisdiction for writing property and casualty insurance to usually a related group.
In this format, the physicians pay insurance premiums to the CIC just like they would to a traditional insurance company. If it’s structured correctly the physicians can receive tax benefits. They can deduct the premiums paid and later retain the profits from the entity when the entity gets dissolved.
Physicians can use the CIC to supplement their existing malpractice policy and provide them the ability to customize their policies. CIC can add benefits like paying for the physicians legal fees but not be available to pay creditors or claimants.
Although CIC may seem to be an ideal option for physicians, the need to determine the right structure is important. Improper structure can create tax liability and lack of asset protection. Cost and affordability can also be a factor since the cost can be as high as $200,000 to establish. Physicians should consider using professionals who have experience in establishing a CIC, a good alternative that I will review in more details in the upcoming months.
Although, some attorneys would technically defend that the lawsuit is a professional liability claim against the doctor not the medical practice assets. The reality is that lawsuits often are done as a broad suit which includes everybody possible. A Physician should consider a comprehensive plan, review the pitfalls and benefits of all strategies afforded to them to protect their personal as well as the practice assets. |
