Once the plaintiff obtains a legal judgment against the doctor in a malpractice lawsuit, the plaintiff becomes a creditor of the doctor, and the doctor becomes a debtor. The plaintiff can now use the judgment to collect and attach almost any and every personal and business asset of the doctor. Consequently, the focus of all asset protection planning is to remove the debtor-doctor from legal ownership of his assets, while retaining the doctor’s control over and beneficial enjoyment of the assets. jitendra swarup md
There is no “magic bullet” asset protection strategy. Depending on the assets owned by the doctor, the aggressiveness of the plaintiff and certain other factors different structures will be used to protect a doctor’s assets. The timing of the planning is important as well. While it is always possible to engage in asset protection planning, even after a lawsuit has been filed, the planning will be a lot more effective and simpler when implemented before a malpractice claim arises.
No asset is more important to shield from creditor claims than a personal residence. Personal residences represent the bulk of many people’s fortunes, and have great sentimental value.Creditors do not pursue the residence itself, but the equity in the residence that can be converted into money through a foreclosure sale of the residence. There are two equity stripping techniques.
One way to strip out the equity is by obtaining a bank loan. Even if we assume that a bank would lend an amount sufficient to eliminate 100% of the equity, the cost of this asset protection technique is staggering. A $1 million loan bearing a 7% interest rate, costs $70,000 per year. Another way to strip out the equity is to encumber the residence by recording a deed of trust in favor of a friend. This avoids the carrying costs of an actual bank loan. With this technique it is important to know the intelligence and the aggressiveness of the creditor. Some creditors may stop trying to collect when they realize that there is no equity in the residence. Others may dig deeper, and if the debtor cannot substantiate the transaction as an actual loan, the deed of trust will be set aside by a court as a sham.
In addition to stripping out the equity, it is also possible to protect the residence by transferring ownership but retaining control and beneficial enjoyment. This can be done in a number of ways.An arm’s-length cash sale is the best way to protect the residence (and the equity in the residence) because it is much easier to protect liquid assets (see discussion below) than real estate. While this technique affords the doctor the best possible protection for his home, it is also the most radical and may result in additional income taxes. This technique is usually reserved for doctors facing very determined plaintiffs, or doctors facing government agencies.
An alternative to an outright sale is the sale and leaseback of the residence to a friendly third-party on a deferred installment note. This allows the doctor to transfer the ownership of the residence without having to move out. This structure works only so long as the doctor can establish the legitimacy and the arm’s-length nature of the sale.The contribution of the residence to a limited liability company (“LLC”) or a limited partnership may be another way to protect the personal residence. The protection afforded by LLCs and limited partnerships is derived from the concept of the charging order protection, addressed in more detail below. While the charging order protection is generally powerful, its usefulness may not extend to personal residences.