Common Sense

Ask the Expert – September/October

Joel Schofer, MD
LCDR MC USN, Naval Hospital

“Ask the Expert” is a Common Sense feature where subject matter experts provide answers to questions provided by YPS members. This edition features a leading authority on insurance and financial planning, Shayne Ruffing, ChFC AEP, is a Chartered Financial Consultant, Chartered Life Underwriter and Accredited Estate Planner with the Potter Financial Group.

Question:

What are some legal and financial maneuvers to protect my financial assets?

Answer:

Protecting Your Assets – The early years.

by M. Shayne Ruffing, ChFC

Among physicians within the first eight years of practice, it is not uncommon for me to hear the question: “What do I need to do to protect my assets?” 

It is a valid question. Malpractice litigation is not slowing down for most specialists, particularly those of you on the “front line” of medicine.

This article is designed to give you a practical understanding of the key factors involved in protecting what you own, plan to own or plan to pay off.

To evaluate asset protection, you have to ask yourself the honest question: “What do I have that someone would want to take?” In the early years of a practice, the reality is that the answer is often: “ Not much!”

In my experience it takes between six and nine years of practice to really begin to get a handle on paying down student loans, accumulating retirement funds, building savings and maintaining a stable cash flow. Recognizing this, I and the legal and tax professionals that I partner with take the following approach in evaluating appropriate protection strategies:

Understand where you are actually vulnerable:

There are some things we just can’t control. The most personally catastrophic of these are, typically, serious illness, disability and death. To eliminate these variables from your financial plan, there are a few easy things you can do:

  • Establish a systematic monthly savings program – this will self-insure against short-term expenses associated with injury and illness.
  • Maintain adequate medical insurance for you and your family.
  • Try to design a disability income plan that will replace 100% of your net income.
  • Maintain adequate life insurance to protect your family’s financial security should you have a “short week.”
  • Purchase a comprehensive umbrella insurance contract for your property. The cost is negligible for the extra layer of protection it provides.

Understand what does and does not need protection:

There are two assets that have historically always had preferential treatment. They are:

  • Qualified retirement plans (401(k), 403(b), IRA, Roth IRA, other)
  • Cash values inside personally owned life insurance

In the early years of a practice, most individuals accumulate their most significant asset inside their retirement plans. This is inherently protected from creditors, so fund your retirement at the maximum amount that your budget and the will allow! This provides the dual benefit of preparing for your own financial independence and naturally protecting your accumulation. If you find yourself without additional places to put long-term money, look at permanent life insurance as an asset accumulation vehicle. Permanent insurance can be designed to have low internal insurance expenses and can generate competitive returns by investing in professionally managed equity and fixed income accounts. In addition, the assets are protected from creditors in most states because they are considered part of your basic life insurance protection.

Understand the significance of ownership:

In most cases, if you don’t own it, it is difficult for me to sue you for it. At some point, you will begin to accumulate assets outside of your retirement plans, life insurance, etc. You will have loans paid down or eliminated, and you will have your standard of living protected through adequate insurance. At this point, you should understand the legal techniques for sheltering assets which involve the transfer of ownership either now or at your death or disability. An estate attorney can advise you regarding the best ownership techniques within your particular state of residence.

Before transferring ownership of something, consider a few possible side effects:

  • If you transfer assets to your spouse (home, autos and cash accounts) and that relationship ends, it could get messy.
  • If you transfer assets to something that can never be taxed or attacked in your estate (Irrevocable Trusts), you will likely lose control and use of them.
  • If you establish alternate entities to own your business or other assets (LLC, PLLC, S-Corporation), you pick up an additional layer of legal and tax complexity to maintain those relationships.

This is not to say that these are not valid techniques. All of them are appropriate in many situations, and I recommend them frequently. For purposes of this article, however, it is uncommon to find this necessary before hitting the ten year mark in your practice. With malpractice coverage protecting the first $2,000,000 or $3,000,000 of vulnerable assets, I find it very rare for starting physicians to have concerns beyond that.

In the majority of situations, adequate asset protection can be established through the appropriate use of common legal documents such as wills, powers of attorney and coordinated beneficiary designations (these should be reviewed for all life insurance and retirement programs). In many states, titling your home, and perhaps other eligible assets to be owned as Tenants by the Entirety, provides the protection to the only significant asset (your residence) that is otherwise unprotected. In short, this means that a creditor has to have claim against both owners (husband and wife), as opposed to just one to attack this asset.

As always, I recommend that you establish a team of trustworthy advisors who work well together and will serve in your best interest. This team should include someone who serves as the coordinator and should have professional representation in the areas of investments, insurance, estate law and accounting.

I wish you every success in your career, and thank you for your ongoing contributions to our society.

Shayne

Shayne Ruffing, CLU ChFC is the creator of the Confident Transition Plan ™ for medical residents and the Physician Disability Income Analysis ™ . Shayne specializes in executive benefit planning for physicians and medical practices. He can be reached at 800.225.7174 or on the web at www.mybpgincp.com.

Shayne is a Financial Advisor offering Securities and Advisory Services through NFP Securities, Inc., a Broker/Dealer, Member NASD/SIPC and Federally Registered Investment Advisor. NFP Securities, Inc. is not affiliated with the Benefit Planning Group.

If you have a question that you would like to have answered by an expert in a future issue of Common Sense, please send it to jschofer@gmail.com.

The views expressed in this article are those of the authors and do not necessarily reflect the official policy or position of the Department of the Navy, Department of Defense, nor the U.S. Government.