A Doctor’s Guide to Protecting Their Assets

M. Hussein Houjaij

A very common joke used by most doctors who have had a bad experience with a lawyer is that “there are more lawyers than doctors in a hospital.” Although the joke itself is not completely true, it’s also not far from the truth. More and more doctors are having to worry about being sued for some form of malpractice. Whether that makes doctors more alert when conducting a procedure, or more nervous, has yet to be proven. But what is quite apparent is that lawyers are quick to pull the trigger on a lawsuit whenever a doctor is on the receiving end of the complaint.

So what happens when a doctor is in the middle of a lawsuit where the potential judgment of the liability exceeds the doctor’s malpractice limits? Without a properly structured plan in this common scenario, the doctor becomes susceptible to having his or her personal assets exposed and seized; this can include bank accounts, investments, a primary residence, and rental property, among other assets.

However, with a few simple steps and with even the most simplistic plan in place, a doctor can potentially save and protect millions of dollars from creditors and bad lawyers.

The following are three strategies a doctor can, and should, implement into their day-to-day lives; which will, at the very least, help discourage potential lawsuits from arising:

iCreate a Professional Limited Liability Company (PLLC): As recent as December 2010, former Governor of Michigan, Jennifer Granholm, made Michigan one of the top States in the country to start a PLLC. The bill provides a distinct advantage for owners of a PLLC, as the exclusive remedy for any creditor against debtors is through a charging order.

A charging order is best exemplified when a creditor intends to obtain the proceeds that a debtor distributes to themselves through their PLLC. However, if the debtor decides to not make any distributions, which is often the case, then the creditor is left with no alternative remedy.

Moreover, a well structured medical practice with multiple PLLCs can deter potential lawsuits. Please consult with a professional attorney to learn more about creating and administering a PLLC.

ii. Create an Irrevocable Trust: Once created, an irrevocable trust is a trust that cannot be changed, altered or amended. Although this trust is extremely effective in protecting your assets, the downside is that it takes away ownership and possibly control from the creator of the trust (i.e. you). Your ownership loss prevents creditors from being able to reach these assets. Remember, a creditor can only attack the assets that you own; therefore, if it’s not in your name, creditors will not have access to it.

Prior to getting yourself into an irrevocable trust, be sure to speak to an attorney who practices in Asset Protection. More and more attorneys who are not familiar with this topic tend to advise clients that a Revocable Living Trust (RLT) can serve the same purpose. This is not true since an RLT does not take ownership or control away from your assets because the assets remain in your individual name.

iii. Create a Retirement Savings: There is a reason why OJ Simpson is continuing to live a normal life despite having a judgment against him for over $20 million. He took complete advantage of a protective tool that the government made available to the public. The federal government protects  all contributions made to a qualified retirement account from creditors. Therefore, all qualified retirement accounts, such as contributions to 401(k) plans, 403(b) plans and profit-sharing plans are protected from creditors, until you start making withdrawals.

In addition to qualified accounts, Michigan has also allowed contributions to Individual Retirement Accounts (IRA) to be protected from creditors. Therefore, if you have not already done so, it will be worthwhile for you to start maximizing your contributions.

Despite the fact that malpractice lawsuits have been on the rise for the past decade, doctors continue to take the reactive approach to planning and tend to take the necessary steps of protecting their assets only after the filing of a lawsuit. By doing so, the doctor is  exposed to possible criminal charges, as any transfers of funds or assets made after the filing of a lawsuit is considered a fraudulent conveyance. In other words, it is now too late. You must plan before the lawsuit.

Although the foregoing is not a comprehensive list of asset protection strategies, it is however a good starting point. For the number of years invested in your profession, it only makes sense that you consult with a professional attorney who can assist you in preserving your hard-earned wealth before it is all taken away.

Adil Daudi is a partner at Daudi & Kroll, P.C., focusing primarily on Estate Planning, Asset Protection, Business Litigation, Corporate Formations, and Physician Contracts. To contact him for any questions related to this article or other areas of law, he can be reached at adil@daudikroll.com or (517) 381-2663.