“I never did anything to her that could be remotely construed as sexual, let alone harassing! And my wife knows I’m telling the truth!” It was “Dr. Jim” on the telephone. We had never met, but he was in a panic. He had just received a letter from a lawyer telling him he was going to be sued by a female patient for sexual harassment. He angrily pleaded, “What’s the use of busting my tail, giving my patients my best, and building up my savings if someone can just sue me and take it all away?” Then he added, “And, no doubt, it’s because I’m financially solid.”
We empathized with Dr. Jim and tried to be as supportive as possible, while knowing he was in for a long, painful, and expensive battle. Even if he were to “win,” the price would be high. And based on the ever-increasing popularity of these harassment and discrimination lawsuits, there’s no guarantee he wouldn’t get hit with a judgment of tens or hundreds of thousands of dollars.
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Prevention BEFORE the Pain of Harassment
Was there something Dr. Jim could have done to prevent this? The answer is yes, and, unfortunately, today the social tendency of people to sue one another makes preventive measures a necessity. With so many looking for a free ride, attorneys advertising, “No pay unless we collect for you,” and “friends” encouraging the disgruntled to sue their doctors, it’s no wonder our court system is clogged and in many instances breaking down.
So what could Dr. Jim have done to avoid a lawsuit? He could have, in the normal course of an overall estate plan, included an asset protection program. To begin with, he could have set up a Family Limited Partnership (FLP) and placed inside it all of his savings, investments, and liquid assets. Using one or more trusts, he could have insulated other assets from claims, even if a plaintiff were successful in getting a lawsuit judgment. He would have made himself a porcupine in the eyes of a sensible lawyer. He could have structured his assets in such a manner that a lawyer, especially one working on a contingency fee, wouldn’t take the case to begin with. An effective asset protection plan is like wearing a suit of armor against the slings and arrows of lawsuits; when lawyers see them, they’re strongly inclined to return their arrows to the quiver and look for an easier target.
Although in the case of our frightened doctor it was after the fact, we began developing a plan to protect him in the future. We took him well beyond malpractice insurance (which doesn’t cover harassment, discrimination, general liability, and other miscellaneous claims). When he realized what might have been, Dr. Jim asked, “Why doesn’t every medical professional have a protection plan in effect?” For the most part, it’s because they just don’t know about asset protection and its great benefits. This is easily remedied by talking with asset protection specialists. But, in addition to a lack of awareness, many professionals believe a lawsuit will never happen to them. The United States, however, is the most litigious society on the planet. About 94 percent of all lawsuits in the world occur in the U.S. We have more lawyers per capita here than anywhere else. The American Bar Association predicts that in the next two years one of every four business or professional people will be involved in a lawsuit.
Coordinated Wealth Protection Plan a “Must”
In the April 1999 issue of the Profitable Dentist, Dr. Woody Oakes articulated one of his secrets for success: give your patients your clear, undivided attention. We have also found that advice to be of great value in reducing the incidence of unhappy patients. Remember, it’s generally the unhappy patients who sue you. For added protection and peace of mind, however, you can establish an overall coordinated business, estate and financial plan that addresses every available asset protection strategy. Firms such as ours have become specialists in this field because of this need. Specialists look at the client’s picture as a whole. That means reviewing your estate plan, tax plan, insurance program, investments, and financial plan to be certain they all work together for maximum efficiency and benefits to you and your family–not the IRS or lawyers. Competent counselors and advisors will coordinate with your insurance, financial, and tax advisors.
Asset Protection Tools that Work
In the end, Dr. Jim’s overall plan involved a Revocable Living Trust (RLT), Family Limited Partnership (FLP), Irrevocable Children’s Trust (ICT), and Bridge Trust (Asset Protection Trust). These four tools each served a specific and desired purpose for Dr. Jim and his family.
The Revocable Living Trust is the family’s basic estate manager. It is a credit shelter trust for a husband and wife that preserves both estate tax exemptions. That means that at death, $5.43 Million of the estate (per spouse in 2015) can be transferred tax-free to the heirs. The RLT is set up to administer the care, education, and timed distribution of the doctor’s estate upon the death of both husband and wife. We established a Family Limited Partnership for Dr. Jim and his wife to “own” their savings and personal investments, such as stocks, bonds, and other “safe” assets. The FLP is the family’s first line of defense. With the doctor, his wife, and the four children as partners, we’ve created a very strong barrier between the assets inside it and individual claims or lawsuits. The FLP may also serve to substantially reduce the tax bite of passing assets on to the next generation.
Additionally, Dr. Jim chose to set up an Irrevocable Children’s Trust, which receives by way of a gift to their four children $120,000 worth of Dr. Jim’s paid-for and depreciated office equipment. The ICT, by leasing the equipment back to Dr. Jim’s practice, creates $24,000 of deductible business expense. This is used to pay for the children’s non-essentials, such as music and sports camps, education, vehicles, and insurance. These were all the things for which Dr. Jim and his wife would have had to pay for with after-tax, 50-cents on the dollar money. Because of Dr. Jim’s significant personal investments and his discomfort with the lawsuit atmosphere, he also chose to establish an asset protection trust (Bridge Trust®). If a serious threat arises the Bridge Trust®, as the 90+ percent majority owner of all the assets inside the FLP, can legally remove these liquid assets of the FLP to a foreign jurisdiction completely out of the reach of creditors, lawyers, courts, and governments.
The really great news for Dr. Jim and his wife was the result of setting up a trust for their children to own and lease back to the practice $120,000 worth of equipment. This created an additional $24,000 a year in business deductions that saved Dr. Jim over $8,000 in taxes. Even better, the $8,000 savings will continue every year until the youngest child completes college and even graduate school. We also recommend that Dr. Jim employ his children from ages 7 through 18 by his practice, therefore passing additional business deductible dollars to them.
Bottom Line Asset Protection Benefits
Because Jim was well aware of the consequences of not being adequately protected, he chose a comprehensive package. By the time his children complete their education, how much will Dr. Jim save through correct estate and tax planning, and asset protection? Over $100,000!
Dr. Jim’s total package cost him much less than the savings obtained. Now not only does he have a comprehensive estate plan, but also a very strong asset protection program. This is a brief overview of what can be done to protect your estate before you’re slapped with a lawsuit. Remember, if you wait until afterward to begin putting these measures in place, it just won’t fly and you could be accused of fraudulent transfers.
Everyone’s professional and financial situation is different, and a plan needs to be carefully prepared and skillfully applied to meet a particular client’s needs. But remember that procrastination is the enemy of a calm state of mind. The sooner you begin, the sooner you’ll experience the kind of protection that will put you at ease and make dentistry truly enjoyable. Lodmell & Lodmell will be happy to consult with you over the telephone–without any cost or obligation – to discuss your needs and make recommendations. Call 800.231.7112, and we’ll give you more specific information on the various tools and strategies available for protecting your wealth.
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