Asset Protection for Physicians and Professionals

Asset protection for physicians is simply estate planning with the goal of preserving personal wealth from professional liability. This is particularly important for asset protection for physicians and other business owners. What you want is to keep business creditors and other parties away from your personal assets.

For example, an anesthesiologist or surgeon needs a lot of insurance, due to the risk of lawsuits. Sometimes, the lawsuits are caused by the actions of partners or employees for whom the professional is responsible. So it’s not always within your control, and insurance is not always adequate to dissuade my fellow attorneys from pursuing personal assets.

A plan to protect against that problem must be created before the liability (act) arises to be effective. Such a plan is legal, ethical, and relatively simple to do. But timing is critical so don’t delay!

What is Asset Protection?

It is estate planning with the goal of preserving your personal assets from potential business liabilities.

If you have a business, you know there are potential liabilities that go along with that. Lawsuits against businesses happen frequently. You must protect your business assets from predators.

When your plan is set up, including your living trust and limited liability companies, it must be done correctly so your potential business liabilities won’t have access to your personal assets.

Asset Protection for Dentists

Dentists have a particular potential for liability in their profession, and therefore, have the desire to preserve their personal assets from that liability. That is called Asset Protection Planning. It is essentially and simply estate planning with an eye toward protecting assets from potential liabilities. It is a simple thing to do, but there are many concepts that must be understood. There are some actions that could be taken that are unethical, and frankly, illegal. It is, therefore, important to set this up properly, and that is what I do in my practice. My role is to help dentists preserve what they can for their families, and not have to worry about liability through their practice, either directly or for their partners.

If you own rental property, you may have a similar problem; people who are injured or have cause to file an action against the property owner. All of those things impose a real risk for people involved in those activities. There is a way to set up an estate so that you can have peace of mind. That is what we do.

Family Limited Partnership (FLP)

This is becoming one of the most popular methods to pass the equity in a larger estate to the heirs at a discounted rate while retaining control, and at the same time, protecting the assets from lawsuits.

A Family Limited Partnership may be used to begin shifting ownership from your estate to your heirs without losing control. The Limited Partnership is becoming a more popular staple of estate planning for a number of reasons. A major one is for asset protection.

  1. It enables a parent or grandparent to divert income from partnership assets to children and grandchildren in lower tax brackets.
  2. It allows gifting of limited partnership interests to reduce the size of your estate without placing cash or property directly in the control of the donees. You retain control over the use and nature of the assets in the Family Limited Partnership.
  3. Limited partnership interests are also easily divided to enable you to meet the annual exclusion limits. This helps reduce the size of the taxable estate without giving up control.
  4. The general partner ceases to have any rights to vote or control the partnership upon death. For this and other reasons, partnership interests are subject to various valuation discounts at death that help minimize the size of the estate for estate tax purposes.
  5. It provides a degree of lawsuit protection. Certain characteristics of the partnership ownership form make it attractive as a means of safeguarding your assets.

Here’s how it works:

Partners hold the partnership property in a special form— a tenancy in partnership. Partnership assets are not subject to the debts of either the general or the limited partners.

If a creditor gets a judgment against one of the partners, the creditor applies for a “charging order” to enforce his judgment. This is an order by the court charging the partnership interest of the debtor partner. This means that if the partnership pays any income to the partner, it now must be paid to the judgment creditor. The creditor does not become a partner of the partnership but is entitled to receive any distributions which would be given to the debtor partner.

Now, here’s the fun part.

The General Partner of a Family Limited Partnership can choose to distribute the partnership income or to accumulate such income and reinvest it in the Partnership. But he must still issue a “K-1″ (a tax report) showing each partner’s share, and tax liability. So, if a general partner decides not to make a distribution of income, the creditor only gets the “K-1″. He will now have to pay taxes on the income that was never really distributed.

So, transferring assets into a limited partnership is an excellent way to safeguard your property.


  • Asset protection
  • Estate equity gifting at discounted rates
  • Some income tax splitting -Add-Additional income tax return required
  • Must have a business purpose
  • Costly to establish

Personal Residence Trust (GRIT)

With a personal residence trust, you transfer your home to an irrevocable trust for a period of years (usually 10-15 years). You retain the right to live in and use the home for that term of years. After that time the home belongs to your children. In effect, you are giving your home to your children today, but they will not own it until the end of the trust. Because your children will not actually receive the home until sometime in the future, the value of the gift is reduced or discounted. This uses less of your applicable exclusion amount than if you had kept your home together with its future appreciation, in your estate.

If you live longer than the term of the trust, you may have to pay rent and upkeep on the use of the home. Your residence will not receive a “stepped-up” basis when you die. Its basis will be your basis at the time of the gift. So it is necessary to compare the difference between the expected income versus estate taxes.

If you should die before the term of the trust is up, the residence will just be included in your personal estate for estate tax purposes. The personal residence trust is also sometimes referred to as a Grantor Retained Income Trust or GRIT.

Irrevocable Life Insurance Trust (ILIT)

The ILIT is an irrevocable trust which holds assets outside of your estate. This will exempt these assets from estate taxes upon your death. An ILIT is often named as the owner and beneficiary of a life insurance policy. This will make certain that the insurance proceeds are passed to the beneficiaries without first being taxed. The ILIT produces the following benefits:

  1. Less Taxes. Because the ILIT now owns the insurance policy, you retain no ownership interest, so the proceeds of your insurance will not be included in your “taxable estate” upon your death. Less taxes means you save money!
  2. Gift Tax Exclusion. Withdrawal powers are included in the ILIT. This allows you to take advantage of the annual gift tax exclusion to add to the trust or to pay premiums.
  3. Liquid Funds to Pay Taxes. Upon your death, your estate will need to pay its debts, costs, and taxes. If your estate is not liquid, the Trustee of your ILIT may allow the ILIT to make loans to your estate, or allow the ILIT to purchase assets from your estate. This does not cause such payment from the ILIT to be included in your “taxable estate,” but still allows liquidity.
  4. Control. Even though the trust is irrevocable, you still retain control over the financial instruments held by the trust.

Who needs one? When you die, everything that is in your name and all those things that you control is considered to be in your “taxable estate.” Federal taxes are due on all assets valued at over the applicable exclusion amount. In the case of a married couple with a tax saving A/B or “marital deduction” living trust, taxes are only due on assets valued at more than twice the applicable exclusion amount.

Your “taxable estate” includes the cash value of your life insurance death benefit if you are the owner or if you pay the premiums. You may establish an irrevocable life insurance trust to own your life insurance policies. Since the trust is irrevocable, and since you are not the trustee, the insurance proceeds are no longer considered a part of your taxable estate.

If your estate is approaching the estate tax limits, an irrevocable life insurance trust may reduce your estate taxes. With this trust, your life insurance proceeds will not be subject to any federal estate taxes at all.

1 thought on “Asset Protection for Physicians and Professionals”

  1. Do you think asset protection for physicians is necessary in today’s healthcare landscape? Why or why not?


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