Three Liability Planning Tips for Physicians
As you know, the practice of medicine is a profession fraught with the risk of liability. Aside from medical malpractice claims, physicians need to protect themselves from employment-related issues, careless business partners and employees, contractual obligations, and personal liabilities.
This topic outlines three liability planning tips for physicians:
A Solid Insurance Portfolio is the First Line of Defense Against Liability
Liability insurance is the first shield physicians must use to protect themselves. It provides a source of funds to pay legal fees as well as settlements or judgments.
Types of insurance physicians should have in place include but not limited to:
Property and casualty insurance
Excess liability insurance (“umbrella” insurance)
Automobile and other vehicles (motorcycle, boat, airplane) insurance
General business insurance
Professional liability insurance
Directors and officers insurance
State Exemptions Protect a Variety of Personal Assets From Lawsuits
Each state has a set of laws and/or constitutional provisions that partially or completely exempt certain types of assets owned by residents from the claims of creditors. While these laws vary widely from state to state, in general in California, the following types of assets may be protected from judgments entered against physicians under applicable state law:
Qualified retirement plans (401k)s, profit sharing plans, money purchase plans, IRAs)
Life insurance (To Certain Extend)
Prepaid college plans
Section 529 plans
Disability insurance payments
Social Security benefits
Business Entities Protect Business and Personal Assets From Lawsuits
Business entities include partnerships, limited liability companies, and corporations; however, in California, only one entity type is available, Professional Corporation. With that said, Physicians can create other entity types to protect other assets of the business such as equipment.
Physicians who own their practice need to mitigate the risks and liabilities associated with owning a business (just like any other business owner) through the use of one or more business entities.
Business entities can be an effective tool for protecting a physician’s personal assets from lawsuits. In many states, in addition to the protections offered by incorporating, assets held within a limited partnership or a limited liability company are protected from the personal creditors of an owner. Further, the personal creditors of an owner cannot step into the owner’s shoes and take over the business. Instead, in California like many states, the creditor’s only remedy is a “charging order” which limits the creditor to receive distributions from the entity if and when they are made, but can not participate in management. This protection is only available to a well-drafted operating agreement; many of the shelf or premade documentation does not include this protection.
An added benefit of using a limited partnership or limited liability company to protect a physician’s personal assets is the leverage that can be created for gifting and wealth transfer planning through the use of valuation discounts. With a properly structured limited liability entity, assets held within the entity will be entitled to a discounted valuation for tax purposes.
Discounts can range from 20% to over 50% and allow the physician to gift entity interests for cents on the dollar and at a reduced use of the lifetime gift tax exemption.
Final Advice for Helping Physicians Protect Their Assets
Physicians are constant targets for lawsuits both professionally and personally because they are perceived to have “deep pockets.”
We are experienced with helping physicians create effective, multilayered asset protection plans. Please call us with questions about this type of planning and to arrange liability protection consultations.
Nehoray & Drake llp - Estate Planning Attorney