Excerpted from The Biggest Legal Mistakes Physicians Make: And How to Avoid Them
Edited by Steven Babitsky, Esq. and James J. Mangraviti, Esq. (©2005 SEAK, Inc.)
Download Free 646 Page E-book: The Biggest Legal Mistakes Physicians Make and How to Avoid Them
Executive Summary
Many physicians attempt to implement asset protection on their own by titling assets among their spouse, children, and other family members. Often in doing so, rather than protect the assets from the physician’s creditor, the assets are exposed to additional creditors, which causes family conflicts and raises gift and estate tax issues. Physicians should proceed with caution and seek experienced counsel when obtaining new assets or transferring title to existing assets.
Mistake 1 Not Getting Advice of Experienced Counsel
Physicians sometimes transfer assets in the manner they believe will best protect them without first conferring with legal counsel. As a result, they may expose their assets to more liabilities than anticipated and receive less protection from third-party claims than could otherwise be obtained. In addition, titling assets among spouse, children, and other family members often has gift and estate tax ramifications that are problematic to undo later. Obtaining competent legal counsel should result in greater protection of assets with less exposure to liabilities and headaches, as well as provide a workable estate plan.
Action Step Physicians should consult with experienced counsel before they start to title assets.
Mistake 2 Making Fraudulent Transfers/Conveyances
Physicians who have been notified of a possible claim often gift or sell assets to protect those assets from creditors. In most states, a creditor who is unable to collect on a judgment will be able to challenge gifts and other transfers made within four years of the time the action on which the judgment is made arose. If successful, a court will undo the transfer (i.e., put the property back in the physician’s hands, thus making it available to the physician’s creditors). Any sale made for less than fair market value or any gift made, including one to a spouse, within the period provided by the state’s fraudulent transfer laws may result in a creditor getting a court to undo the transfer.
Action Step Before a claim is even threatened, physicians should have experienced counsel review their assets to ascertain whether the assets are titled in a manner that provides the physicians with the ultimate legal protection.
Mistake 3 Assuming That Transfer of Title to a Spouse Will Protect the Asset
Physicians transfer their assets to spouses who are not also physicians thinking that the assets will be protected from the physicians’ malpractice claims. Doing so assumes that the spouse does not work, or have an interest, in the physician’s practice. More important, it assumes that the nonphysician spouse will never be liable to anyone for any reason (such as credit card debts, medical bills, intentional torts, or accidents) and that the spouse will never divorce the physician or die before the physician does and leave the assets to the physician. When a physician titles assets in the spouse, there may be estate tax ramifications that will cause more estate taxes to be paid on the second death than need to be paid with proper planning. The Internal Revenue Code permits U.S. citizen spouses to transfer title back and forth between themselves with no immediate gift tax consequences, but if a recipient spouse is a not a U.S. citizen, there will be gift taxes on transfers in excess of $112,000 per year. Finally, a physician’s creditor may be able to undo the transfer to the spouse if a court finds the transfer to be a fraudulent transfer/conveyance.
Action Step Physicians should consult with experienced counsel before they start to transfer assets to a spouse.
Mistake 4 Assuming That Tenancy by the Entirety Provides Adequate Protection
Tenancy by the entirety (TBE) is a form of ownership recognized under common law that can be created and exist only during marriage. Traditionally, once property is put in TBE one spouse cannot transfer or mortgage it without the other spouse’s written consent (although statutes in certain states have changed this practice). Married physicians living in states that recognize traditional TBE (such as Delaware, Florida, Pennsylvania, Michigan, and Rhode Island) may believe their assets held as TBE to be completely protected. Although a creditor of one spouse generally cannot reach traditional TBE property in states recognizing TBE, bankruptcy courts have found ways to reach the debtor spouse’s interest by partition, foreclosure, or otherwise. There are no gift tax concerns to creating the TBE if the donee spouse is a U.S. citizen. Moreover, death and divorce both end any TBE protection.
Action Step Before placing any property in TBE, physicians need to consult with experienced counsel to determine whether the benefits of doing so outweigh the negative effects related to life circumstances and gift and estate tax ramifications.
Mistake 5 Giving Up Ownership or Control Unnecessarily
Physicians take property they own outright and retitle it with another family member as tenants in common or as joint tenants with right of survivorship. A tenancy in common is one in which the interests are unilaterally severable (i.e., one owner can transfer his or her interest without the consent of the other). Since the family member may transfer his or her interest without the physician’s consent, the creditor of the family member may reach the family member’s interest in the property. The death of the family member would not, absent a provision in the family member’s will (or under state intestate successor law), return the property interest to the physician. Creditors (including spouses) of the estate of the family member would be able to reach the deceased family member’s interest in the property held as tenants in common. Thus, the physician could end up with an unwanted and uncooperative “partner” (creditor of the family member).
A joint tenancy with the right of survivorship is similar to a tenancy in common in that it is also unilaterally severable; the family member may transfer his or her interest without the physician’s consent. Thus, while the family member is alive, his or her creditors (including spouses) may reach the family member’s interest in the property. The joint tenancy with the right of survivorship differs from a tenancy in common only upon the death of one of the co-owners. Conversely, if the physician dies first, the physician’s creditors would have no recourse, since the entire property interest would belong to the family member. If the family member dies first, the entire property interest would vest in the physician, providing no protection from the physician’s creditors.
Both tenancy in common and tenancy with right of survivorship are subject to partition or severance by a court.
Action Step Physicians should discuss the pros and cons of making title transfers with competent counsel before doing so.
Mistake 6 Assuming That Transferring Title to Children or Other Family Members Will Protect Assets
Physicians transfer their assets to their children or other family members assuming that the assets will be protected from malpractice claims (sometimes with the expectation that the asset will be returned at some future date). Doing so assumes that the child or family member does not work, or have an interest, in the physician’s practice. More important, it assumes that the child or family member will never be liable to anyone for any reason (such as alimony or child support, credit card debts, medical bills, intentional torts, or accidents) and that the child or family member will make the asset available to the physician at a later date or when asked. It also assumes that the child’s or family member’s estate will return the asset to or distribute it according to the physician’s wishes. But what if the child/transferee dies first? His or her spouse may have different thoughts about returning the asset. When a physician titles an asset in the name of a child or family member, there may be gift tax ramifications causing the physician to owe gift taxes in that year, or estate tax ramifications that will cause more estate taxes to be paid on the second death than need to be paid with proper planning. Finally, a physician’s creditor may be able to undo the transfer if a court finds it to be a fraudulent transfer/conveyance (generally, a four-year window).
Action Step Physicians should not rely on the willingness or ability of children or other family members to give back assets. Physicians should consult with experienced counsel before starting to transfer assets to a child or family member.
Mistake 7 Assuming That Children or Other Family Members Will Be Willing and Able to Transfer Assets Back and Forgetting That They Can Have Their Own Liabilities
Physicians faced with malpractice threats sometimes transfer title of assets to children or other family members expecting that when the threat is over (or when the physician so desires), the assets will be given back. Assuming that the transfer is a true gift (no strings attached), the physician is counting on the goodwill of the recipient to give it back, as well as the recipient being alive and not having subjected the asset to his or her own creditors. For example, if a doctor transfers rental property to his unmarried cousin, who later marries, has a son, and then divorces his wife, that rental property may end up being transferred by a court to the cousin’s spouse as part of the divorce settlement (or its rental income could be garnished for child support). Thus, despite the cousin’s intentions, the physician may have no recourse. In another example, a doctor gives his stamp collection to his elderly retired aunt, who seemingly isn’t likely to incur liabilities. Unbeknownst to the physician, his aunt has cosigned a loan for her ne’er-do-well nephew, and the lender turns to her to pay the debt. When her liquid assets are insufficient to pay the creditor, the lender takes the stamp collection.
Action Step Physicians shouldn’t rely on the willingness or ability of family members to return assets at a later time, and must remember that the assets could be exposed to a new set of creditors—that of the transferee.
Mistake 8 Assuming That Children or Other Family Members Will Be Alive to Give Back Assets
Physicians transfer title of assets to their children or other family members expecting that when the threat is over (or the physician so desires), the assets will be returned. The first assumption is that the child or family member who received the property will be alive at the time the physician wants the asset back. If not, the family member’s estate would have no reason to return the property; that is, unless the child or other family member provided for its return in his or her will or trust. If the property is not returned by the family member’s will or trust, the physician is out of luck. If the will or trust does return it to the physician, the return may be at a time when the very creditor the physician sought to avoid is ready to attach the property. A properly implemented asset protection trust would ensure the physician that the property will always be available for the physician’s benefit and enjoyment while the physician is alive, and available for the physician’s chosen beneficiaries upon the physician’s demise.
Action Step Physicians should assume that once they make a gift it is forever gone. Instead of making gifts for asset protection, physicians should consider the use of properly structured asset protection trusts, so that the assets will be available for the benefit of the physician during the physician’s lifetime.
Mistake 9 Neglecting the Gift Tax Ramifications of Transferring Assets to Children or Other Family Members
Physicians make gifts to their children or other family members without regard to the gift tax ramifications. While a transfer may protect the asset from the physician’s creditors, it may also use up the physician’s annual gift tax exclusion (currently $11,000 per donee per year) and use up the lifetime unified credit ($1.5 million for gifts made for years through 2004).
Action Step Before making a gift or transferring assets for less than fair market value, physicians should consult with a qualified professional to ascertain the gift tax ramifications.
Mistake 10 Neglecting the Estate Tax Ramifications of Transferring Assets to Anyone Else (Including the Spouse)
Physicians transferring title by gift (including “sales” for less than fair market value) often do so without regard to the effect the transfer has on their estate, including the estate tax ramifications. Improper titling of assets may cause additional estate taxes to be incurred. For example, if a physician places title of all the family’s assets in the name of the non physician spouse (or as tenancy by the entirety or joint tenancy with right of survivorship), when the second spouse dies all the assets will be subject to estate tax and only one unified credit will be used, rather than two (one for each spouse). If gifts are made in excess of the annual gift tax exclusion in any year, the excess will eat up the one-time unified-credit amount and may cause additional estate taxes to be due on death. With proper planning, the estate taxes can be minimized, if not avoided entirely. In addition, “temporary” gifts to select family members may result in the physician’s estate being distributed in a manner that the physician had not anticipated and cause unnecessary strife among family members (such as when one or more family members inadvertently receive more than their “fair share”).
Action Step Before making a gift or transferring assets for less than fair market value, physicians should consult with a qualified professional to ascertain the estate tax ramifications.
Conclusion
Physicians seeking to protect their assets who are mindful of these mistakes and take steps to avoid them will be most likely to achieve the desired protection for their assets.
Additional Resources
- P. Donlevy-Rosen, “Weighing in on APTS,” Offshore Finance U.S.A. (Winter 2003)
- H. Rosen, “Asset Protection and Control: You Can Have Both,” Florida Medical Business, Vol. 16, No. 12 (June 24 – July 7, 2003)
- H. Rosen, “Offshore Trusts Safest Way to Protect Fixed Assets,” Florida Medical Business, Vol. 16, No. 3 (Feb. 4 – 17, 2003)
- www.ProtectYou.com (website authored and maintained by Donlevy-Rosen & Rosen, PA, a law firm in Coral Gables (Miami), Fla.)
Written by:
Patricia Donlevy-Rosen, Esq.
Peer reviewed by:
Howard D. Rosen, Esq.