The Basics of Asset Protection

We are going to talk about asset protection. And there is all kinds of stuff that can be done in asset protection that is complicated, that is expensive, that may or may not work. But the basics are super simple. They're extremely reliable in their effectiveness and they're cheap. So let's talk about what the basics of asset protection are. First of all, what is asset protection? Well, asset protection is not losing everything you have usually to a lawsuit. You know, mostly doctors listening to this podcast, the main liability they think about is malpractice, right? Malpractice is always personal. You can't just incorporate your practice and somehow get rid of your malpractice risk. It's always personal. So that means that your personal assets are at risk. If you hurt somebody from malpractice, you got to pay for the damage, right? The damage in their pain and suffering, the damage in their lost earnings, those sorts of things, the additional medical expenses they have. So what do you do to help protect against that? Well, the first line of defense and liability is insurance for malpractice. That's professional liability insurance for personal stuff, that is personal liability insurance. And there is a component of your homeowners or renters insurance that is liability coverage. There is a component of your auto insurance that is liability coverage. What you should do in addition to that, though, is stack an umbrella policy on top of those. So this is an additional personal liability policy. It's not very expensive. You can buy $1 million or $2 million or $5 million of additional liability coverage that sits on top of your homeowners and your auto policy and can be used in the event that you hurt somebody. And it's really expensive to make them whole. And that's the whole point of insurance coverage. Not only does it make them whole, so it's not just good for you, it's good for whoever you hurt, but also pays for your defense. So the insurance company's on the hook to pay lawyers to defend you for some ridiculous claim you might have against you. And in the event that they do have a claim against you and you need to settle or you go to court and lose, the insurance covers the payout, so you're not losing personal assets. First line of defense, if that fails and it's not reduced on appeal, you have some above policy limits judgment. It's not reduced on appeal, and indeed you are liable. You got a few options. One, you can pay them, right? You can pay the judgment. And it turns out if you look historically at the very few above policy limit judgments that are out there, most of them are actually not that much money. It's like a little bit of a zinger given to the doctor to say, hey, you really need to be more careful with your patients. You're going to have to pay $100,000 out of pocket. Well, that's often doable. You can do that. And so you pay them if that's just impossible. Right. You got some crazy huge judgments against you. It's $5 million. You don't have it. Even if you had it, you don't really want to pay it. You feel like you got hosed. Well, you do have another option. You can declare bankruptcy in this country. And most asset protection rules and techniques and law is what happens when you declare bankruptcy, what do you get to keep? And these laws are all state specific. So you want to understand your state laws. Right? So if the first line of defense is to buy insurance, the second line of defense is to know what your state laws are, because that's going to matter what you do next. But in every state, maxing out your employer provided Erasa retirement accounts is a great asset protection move because you declare bankruptcy. But guess what? You get to keep, in every state, you get to keep your 401k, right? So all the more reason to max that thing out. You get to keep it. And in most states, you get to keep your solo 401k and your IRA, right? So maxing out these retirement accounts is an extremely effective asset protection technique. Not only does it reduce your taxes, boost your investing returns, make your estate planning easier, it gives you these great asset protection benefits. So that's kind of a no brainer. First move asset protection technique. Another thing you want to do is you want to make sure you're titling your property properly. In many states, you can title your property as tenants by the entirety. This is for a married couple, right. If it's titled tenants by the entirety, that means both of you own the entire house, for instance. So if you just, you get sued and you have big judgments against you, they can't take your house because your spouse owns the entire house. Okay, it's kind of a cool trick. Doesn't work in Utah, but it works in many states. In fact, in some states you can apply it to your brokerage account too, right? This doesn't protect you if they sue both of you because they slipped on your sidewalk and got hurt out there. Buy the umbrella insurance for that. But it's very effective against malpractice in the states where it takes place. Obviously, some states have different rules about how much of your homestead, your home equity you get to keep. It's not much in many states. In some states, it's your entire home. You know, every state has these unique laws. You know, you got to keep two shotguns and 12 cattle and 120 sheep. And you know, there's all kinds of weird rules all over the country as far as what you get to keep in a bankruptcy kind of situation. But those are the mainstays, right? Mainstays are buy insurance, max out your retirement accounts, title properties, tenants by the entirety if you're allowed to. When you get beyond that. Now we're starting to talk about spending significant time, significant money losing out on benefits of what you'd rather do with your money and your assets. And it becomes less and less likely to actually work. So sometimes people buy annuities. In some states, annuities, some of your annuity is protected from creditors, cash value life insurance, like whole life insurance, in some states it's protected from creditors. You get to keep it if you declare bankruptcy. And then we start talking about different types of trusts. There are asset protection trusts, there are overseas trusts, there's obviously irrevocable trusts. If you just give the money away to somebody else long before there's any claim against you, it's no longer your money, they can't get it. And so a lot of asset protection techniques deal with ways you can give the money away and yet still somehow get some sort of benefit from it. And these are more complex techniques when the ones we've already talked about aren't adequate for your situation. But for many, many docs, just buying insurance, maxing out your retirement accounts, understanding your state specific laws, and titling property properly is going to be the mainstay of your asset protection plan.

The hosts of the White Coat Investor are not licensed accountants, attorneys or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.