The primary asset protection dilemma: the taxable account

[PHANTASOS]

Whether you are a highly compensated specialist who makes maximum contributions to a cash balance plan, profit sharing plan, and backdoor Roth IRA (plus spouse), health savings account, and 529’s or an unmarried primary care physician who is a W2 employee with a 401k and IRA you could find yourself in the position of saving in excess of the limits of your ERISA or state-law-protected accounts. No matter what your situation is, let’s just say you have a taxable account (at Vanguard, Fidelity, TDAmeritrade, etc.) that would be vulnerable to a potential future, unknown creditor.

You already have a substantial umbrella policy, good malpractice coverage, you practice medicine responsibly, you change the batteries in your smoke detector, and you drive safely (including driving slowly when exiting the parking garage where all the highly paid physicians walk to their parked cars).

You live in a state that doesn’t have a very generous homestead exemption, and your state doesn’t allow you to title your home as tenants-in-the-entirety.

You have no appetite for buying any type of Cash-Value Life Insurance (whole life, variable life, universal life), or variable annuities, etc. even though they may offer some protection in your state.

You have considered investing in LLCs or limited partnerships that buy real estate, but you live in a state where a charging order is not the exclusive remedy for a creditor of such an investor. You would prefer that your taxable account be simply invested in tax efficient, inexpensive, broadly diversified index funds.

You currently have no known creditors, and you are not trying to accomplish a fraudulent conveyance to escape paying a known debt.

So... How can you make sure the assets in your taxable account are always yours?

[asmallchild]

Retire?

I'm not sure you can. I've heard it is rare for a malpractice decision to actually exceed the coverage limits of your malpractice insurance. Perhaps you can title your taxable account as tenants by the entirety but as others have noted, the chance of divorce is much higher than that of a unfavorable malpractice decision exceeding your policy limits.

 

[anojones]

I suppose I could Google this and it is probably not always clear, understanding the risk of divorce- is a taxable account safe if it is in the spouse's name only?

[The White Coat Investor]

Phantasos wrote:

Whether you are a highly compensated specialist who makes maximum contributions to a cash balance plan, profit sharing plan, and backdoor Roth IRA (plus spouse), health savings account, and 529’s or an unmarried primary care physician who is a W2 employee with a 401k and IRA you could find yourself in the position of saving in excess of the limits of your ERISA or state-law-protected accounts. No matter what your situation is, let’s just say you have a taxable account (at Vanguard, Fidelity, TDAmeritrade, etc.) that would be vulnerable to a potential future, unknown creditor.

You already have a substantial umbrella policy, good malpractice coverage, you practice medicine responsibly, you change the batteries in your smoke detector, and you drive safely (including driving slowly when exiting the parking garage where all the highly paid physicians walk to their parked cars).

You live in a state that doesn’t have a very generous homestead exemption, and your state doesn’t allow you to title your home as tenants-in-the-entirety.

You have no appetite for buying any type of Cash-Value Life Insurance (whole life, variable life, universal life), or variable annuities, etc. even though they may offer some protection in your state.

You have considered investing in LLCs or limited partnerships that buy real estate, but you live in a state where a charging order is not the exclusive remedy for a creditor of such an investor. You would prefer that your taxable account be simply invested in tax efficient, inexpensive, broadly diversified index funds.

You currently have no known creditors, and you are not trying to accomplish a fraudulent conveyance to escape paying a known debt.

So… How can you make sure the assets in your taxable account are always yours?

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Sounds like you've done what you can to me. You can give some of the assets away- to kids via UGMAs, family trusts and limited partnerships etc. Otherwise, it's a matter of hiding them in offshore stuff such as this: https://www.whitecoatinvestor.com/portable-offshore-asset-protection-trusts/

I suppose you could also put it into an LLC with other members so all creditors could do is a charging order, but there has to be a legitimate business there somewhere.

In my opinion, this is where a good asset protection attorney in your state can make a difference. The easy asset protection stuff (tenants by the entirety, umbrella insurance, maxing out 401(k)s, buying cash value insurance etc) doesn't require help from an attorney.

[Zaphod]

Make sure you're practicing in a state with tort reform so its basically impossible for judgements to approach let alone exceed your caps. This helps me sleep at night. The likelihood you will have something brought against you is high, the likelihood you will lose is very low.

[jfoxcpacfp]

Your biggest risk is probably a divorce settlement. If you are unmarried and plan to marry, consider a prenup. If you are in a community property state, understand how your assets will be treated in event of divorce (both those you brought into the marriage and those you will build together. Even assets you owned prior to marriage can be at risk if they are treated as community property after you marry. If it's not the first marriage, especially if children are involved, a prenup should be considered mandatory. Also make sure your will and beneficiaries are updated.

To respond to @A_Jones, a separately-owned investment account would be considered in the property settlement but not mandatory for ex-spouse to receive. Retirement accounts require your spouse to sign off if you are not naming him/her as a beneficiary. I don't know if you would call this "safe" or not and, again, it depends upon whether you are in a CP state or not.

[PHANTASOS]

The White Coat Investor wrote:

Sounds like you’ve done what you can to me. You can give some of the assets away- to kids via UGMAs, family trusts and limited partnerships etc. Otherwise, it’s a matter of hiding them in offshore stuff such as this: https://www.whitecoatinvestor.com/portable-offshore-asset-protection-trusts/ I suppose you could also put it into an LLC with other members so all creditors could do is a charging order, but there has to be a legitimate business there somewhere. In my opinion, this is where a good asset protection attorney in your state can make a difference. The easy asset protection stuff (tenants by the entirety, umbrella insurance, maxing out 401(k)s, buying cash value insurance etc) doesn’t require help from an attorney.

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It's been almost 3 years now... I personally think the forum is somewhat more experienced/mature, certainly the membership is larger.  Perhaps revisiting an old post could yield more answers.

I maintain that the primary asset protection dilemma (the most important issue by far) is how to protect the taxable account for anyone who saves in excess of their statutorily protected accounts (401k, profit sharing, cash balance plan, IRA, Roth IRA, etc...).

In the comment section of this thread WCI himself mentions that after maxing retirement accounts and acknowledging that he has exposed/vulnerable assets in taxable accounts: "We may do the Utah Asset Protection Trust thing to to protect most of the rest."

Many states (not just Utah) have domestic asset protection trusts.  Another option might be a special power of appointment trust (for people who lives in states without DAPT).  Foreign domiciled trusts might be another option (this starts to become unattractive to me personally).

Does anyone have experience with any of these?  I would be interested to hear about cost (initial, annual), hassle, and any other opinions that may be valuable.

Thanks

[MPMD]

This is a fascinating question albeit one that doesn't apply to me at this time.

I think there must be a point of personal assets where practicing clinical medicine is just not worth the exposure if you work in a high risk field. I don't know where that is, my guess is around the $10M mark? I just pulled that out of my first cup of coffee. I mean at that point you are set beyond any reasonable worry and likely have created generational wealth. Your marginal addition to that based on your physician income is probably not going to be life-changing although it may be numerically impressive.

I am always going on about how fear of losing personal assets in a med mal judgement is not worth worrying about for the most part. Most of this is informed by my 10 years since med school in a "med mal cesspool" called Cook County where every physician I know seems to be just fine. But at some point yeah it's not worth the exposure.

I mean consider an extreme example, if you inherited $100M and didn't have ironclad asset protection it wouldn't be rational to practice right?

This is one of the ways in which our med mal system really sucks. The only time MD assets should ever even be on the table should be in cases where there is essentially malfeasance not just negligence.

[Hatton]

I have a fair amount of money in a taxable account.  I do not have any type of trust.  I have an umbrella.  I quit OB.  I choose not to worry about this topic.

[Raster]

If you are far enough afield to be looking into shady asset protection schemes (not saying they are all shady, but if you - not the promoter, you - cannot articulate a good business reason for the structure, assume it's shady), it is worth while to consider 529 plans.  Compared to many of these schemes, 529's are excellent for asset protection.

In most states, 529 plans enjoy very strong asset protections, and unlike almost all asset protection schemes, they have favorable estate tax treatment if in your kid's names.  You are limited to how much you can put in them per year only by the gift tax exemption (I assume you want to stay under this to avoid paperwork etc) but there is no limit to the amount you put into a 529 plan for yourself.  A couple with two kids can contribute up to $60K to the kids plus what they wish to their own 529's.

If everything goes well, the 529 makes an excellent inheritance.  If you face a ruinous judgement, children can be encouraged to attend a lower cost school.  Considering the cost of top private undergrad + private dental school + dental fellowship is currently potentially $900K, to say nothing of future increases, it is highly reasonable to save a lot in a the 529 for education, assuming everything goes well for you.

The tax treatment of 529 plans used for other than educational purposes is unfavorable for equity index funds, but quite favorable for fixed income securities or anything (like REITS) taxed at ordinary income rates.  You actually come out ahead even with the 10% penalty in high tax states, even assuming maximal tax rates during withdrawal.  If you have the potential for tax arbitrage (lower tax rate in future or move to a lower tax state) you are even further ahead.  You could plan tax efficient asset location across all accounts.

I would not look at 529 plans just for the asset protection benefits - the tax benefits are great, but if you need to be saving for education (either your children's, or your own future learning plans in retirement), it is reasonable to not worry about excess funds in the 529 plan.

[Tim]

Has anyone heard the term “home country bias” regarding investments? That is buying US companies.

Investing offshore can greatly enhance asset protection legitimately. I am not talking tax evasion or the likes.
Jane Doe wants your vacation villa in Mexico. She has a court judgement. Good luck Jane. Her order shows her name and yours. First, US documents aren’t valid she has to go to court in Mexico. Next, she herself can’t own property. Thrown out. You own it through a Mexican trust. She her order needs to be amended. Mean while you are selling it to your brother. I am sorry, but hardball is fair for both sides. Offshore assets like rental properties or investments can be structured that no malpractice attorney in Chicago would even think about attempting collection. Does anyone have a brokerage account or property in foreign countries?

Some foreign doc’s might shed some light. Once you get into international laws, it’s a mine field. I am sure some international business attorneys are expensive, but can pickoff some low hanging fruit. Some might not need an attorney.

[White.Beard.Doc]

This is one of those malpractice risks that are very low probability with potentially very high exposure.

I am in the category of a later career supersaver, currently FI and theoretically eligible to retire but not psychologically desiring retirement as yet.  I continue to see patients in a moderately high risk specialty.  On the one hand, much of our decades worth of savings, liquid and hard assets are theoretically at risk.

So should I stop seeing patients?  Maybe, but I continue to see patients knowing that I have a good basic malpractice policy, and since I practice in a hospital setting, the hospital is my de facto excess coverage.  Several years ago the hospital was on the hook for a 30MM verdict after the 1.3MM of physician coverage was paid out by the malpractice carrier for a hospital physician on a crazy OB malpractice case.

My risk of a typical lawsuit is not that high, and my risk beyond my policy limits is extremely low.  We are probably talking about a less than 1 in a million risk.  Kind of like the risk of being struck by lightning or attacked by a shark while swimming in the ocean.  It isn't zero, but there are probably better things to spend my time and effort thinking about.  I am not currently looking to set up any trusts.

[PHANTASOS]

White.Beard.Doc wrote:

This is one of those malpractice risks that are very low probability with potentially very high exposure.

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I'm at least as concerned about having a teenage driver in the family.  I know what I did behind the wheel when I was 16.

I have some friends that were in a car accident when they were teenagers, where one of them was injured significantly.  That friends parents ended up having to sue the other friends parents (parents of the driver) to recover medical costs.  It wasn't anything personal, just with all of the insurance company nonsense, that was the way it had to be.

The high amounts involved in malpractice lawsuits certainly command attention, but there are a lot of other sources of unanticipated liability.  If I were involved in a fender-bender, I would prefer my occupation remained unknown.  If my teenage child caused a car accident, it would be nice to not have to worry about being stripped of years worth of earnings.

[jfoxcpacfp]

Phantasos wrote:

I’m at least as concerned about having a teenage driver in the family.  I know what I did behind the wheel when I was 16.

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Yes to the 3rd power. I believe this is a much higher risk to a mid-career physician than losing money OOP in a malpractice case. All doctors - at least that I know of - have malpractice insurance coverage. Far fewer doctors have a PUP. Plenty don't even know what it is. Much more likely if they follow WCI or other online physician financial sites, fortunately.

Might as well include your spouse and self as risk factors, too - but teenage drivers? Almost impossible to comprehend the level of distraction when you get 2 or more together in a 3-ton weapon going who knows how fast going who knows where (or 1 with a cell phone for company).

[G]

I'm one of those who doesn't know "PUP"....