More physicians are opting to "go naked" and self-insure.

Lawsuit. Divorce. Bankruptcy. The very words can make a client shudder. But these events don't have to decimate wealth.

Consider the physicians that Coral Gables, Fla., certified financial planner Marc Singer advises. Two-thirds practice bare-no malpractice coverage-and dozens have been sued. Yet the clients sleep soundly at night, their wealth intact. Under Sunshine State law, the full value of a principal residence is exempt from attachment by creditors, as are annuities, life-insurance cash values and retirement-plan assets. "All of the clients' assets are protected so that if they get sued, there's no ability for a plaintiff to (collect)," says Singer, a principal at Singer Xenos Wealth Management. "This is not a sophisticated asset-protection strategy," he admits. "It is very simple - and very safe."

For the advisor providing guidance about shielding assets from peril, the tools available range from basic to arcane, from tried-and-true to brand new. The objective is to make creditors jump through hoops to reach assets, and each technique erects its own unique hurdles. While even the most rudimentary strategies give you some leverage in negotiations, there are cases of failure as well as success at all levels of complexity.

Advisors often use a mix of techniques for each client, keeping in mind the full array of hazards to which wealth is exposed. "Many more people lose assets in a divorce or to family members in some kind of internecine dispute than to claims of creditors," says attorney Stanley Ragalevsky, a partner in the Boston office of Kirkpatrick & Lockhart LLP.

While you owe it to your clients to raise asset-protection issues with them, doing so can also be good for your estate-planning business. "A credit shelter trust is asset-protected because it's an irrevocable trust for the needs of the survivor," says Andy Gitkind, an attorney at The Schlender Law Firm, P.C., in Boulder, Colo. "A QTIP trust can hold the overflow of the first-to-die's estate in order to park that in an irrevocable trust" which is also asset protected, he says. "So, somebody who is on the fence about doing estate planning might choose to do it because there is an ancillary benefit of asset protection."

Before offering advice in this arena, advisors need to understand the concept of fraudulent conveyance. It's a transfer of assets made when insolvent or with the intent to hinder, defeat or delay present or probable future creditors, says expert estate-planning attorney Gideon Rothschild, with Moses & Singer LLP in Manhattan. Once a client has been sued, or has committed an act which could lead to a claim, it's generally too late to move money. The client has to act before there's the whiff of a problem. Courts typically remedy a fraudulent conveyance by voiding the transfer and allowing the creditor to recover the assets. An advisor who assisted with the transaction could be held responsible. "If the creditor can't reach the client's money," says Rothschild, "then they'll go after the attorney or the planner." Now look who needs asset protection.

The first place to seek cover is under sanctioned safety nets. Examine state law to see whether, as in Florida, the principal residence is sheltered via a homestead exemption, or if certain insurance-company products avert creditors' claims. Many states allow a married couple to own their home as tenants by the entirety. That can keep the creditors of one spouse from seizing the residence as long as the other spouse is living there, Ragalevsky says. "The creditor can get an attachment against the house and hope that the non-debtor spouse dies first, so that the house passes to the one with the judgment. But if the wrong spouse dies first, then the creditor gets nothing. So you have leverage for compromising."

A key concern is protection of individual retirement accounts, including SEP-IRAs, and company plans in which the only participants are the owners and spouses. These aren't shielded from creditors at the federal level, Ragalevsky says. State law dictates the protections, if any. Therefore, you need to know the local law before recommending rollovers or setting up plans for the self-employed.

Mitchell Freedman, an advisor in Sherman Oaks, Calif., recently served as an expert witness in a case where an advisor was sued after recommending a rollover to an unprotected IRA and the client's creditor seized hundreds of thousands of dollars. "I can tell you that the advisor's E&O carrier settled that claim," Freedman says. Because the law can be complex, you may benefit from working with a seasoned attorney.

Bear The Brunt

Next consider self-insurance. Work with the client to identify all risk exposures, then assess the probability of an event impinging upon attainment of the client's objectives, says Tim Kochis, CEO of the San Francisco planning firm Kochis Fitz and editor of the new book Wealth Management. "If the consequences are something that the client can tolerate, you may simply choose to bear the risk," Kochis says.

Doctors operating without a malpractice policy are prime examples of self-insureds. Annual premiums now exceed $100,000 for $250,000 of coverage for many specialties, Singer says. "I explain to these clients, 'A portion of the money you are saving on premiums will ultimately be paid to settle cases every once in a while.'

"From a financial standpoint, every self-insured doctor that we have is way ahead by not buying insurance," Singer says. And, not owning a policy when assets are fully protected reduces the likelihood of being taken to court. "There's no financial incentive for an attorney to sue," he says.

Making Transfers

One way for clients to protect wealth is to part with it. When you can't reach assets, neither can your creditors (and vice versa). In Mississippi, another state where some physicians practice bare, "the ones who are comfortable in their marriages are placing assets in their spouse's name," says advisor Dudley M. Barnes, of Barnes Pettey & Associates in Clarksdale, Miss.

This strategy can backfire, however. "I saw once where a guy put everything into his wife's name, there was a divorce, and he got socked worse than he would have otherwise," says CPA/planner Benjamin Tobias, of Plantation, Fla. Moreover, the spouse who owns the assets could become involved in an automobile accident, or sell off assets to satisfy an addiction.

New And Untested

The latest asset protection device is the self-settled spendthrift trusts that are now permitted in Alaska, Delaware, Nevada, Rhode Island and Utah. "These states allow a person to create an irrevocable trust and be a discretionary beneficiary of it, yet the assets are not subject to the claims of future creditors," says Gail Cohen, a senior vice-president at Fiduciary Trust Company International, in New York. Heirs typically join the trust creator as co-beneficiaries. Because distributions are made at the discretion of the trustee, an independent third party who can turn the payout on or off at any time, creditors can't reach the trust assets. Bottom line, clients relinquish control over the property yet retain potential beneficial enjoyment. But will it work?

Critics say no, because under the U.S. Constitution, a state is required by the "full faith and credit" clause to honor judgments of other states. Therefore, unless you are a resident of one of the states that expressly permits these trusts, the asset-protection shield may not hold.

Nevertheless, the structures have attracted a following because they may yield estate-planning benefits. As Rothschild argues, "Regulations provide that if you create a trust which your creditors can reach under state law, then that trust is not a completed-gift transfer and it's includable in your estate. The corollary to that is if you create a trust which your creditors cannot reach, and assuming you retain no rights that would cause inclusion in the estate or cause (the transfer to the trust) to be an incomplete gift, then presumably it would be excluded from the estate."

Accordingly, some advisors employ domestic self-settled trusts primarily for the transfer-tax advantages, with asset protection being a side benefit. Cohen has clients in the $10 million net-worth range who are putting $2 million into these trusts to take advantage of current rules allowing that amount to pass free of all transfer tax. "Previously, clients often were not doing any gifting because they didn't feel comfortable giving up the ability to use the assets in the future," Cohen says, adding that self-settled trusts can be coupled with generation-skipping dynasty trusts in states which allow both, such as Delaware.

Treasure Islands

Occasionally the stuff of clubhouse braggadocio, irrevocable asset-protection trusts established in Bermuda, the Cook Islands or other exotic lands are extremely difficult for creditors to attach. As California CPA J. Ben Vernazza explains, "If a plaintiff wins a judgment in a U.S. court against your client who has a foreign asset-protection trust (FAPT), the plaintiff has to go overseas to try to collect. The foreign court won't recognize the U.S. court's judgment, so the plaintiff will have to hire lawyers in the foreign jurisdiction and start the legal process all over," says Vernazza, owner of the Oversight Group, a moderate-cost outfit that sets up offshore trusts for an initial fee of $4,750 and an annual fee of $2,750.

Although most practitioners peg the minimum that should go into a FAPT at $500,000 to $1 million, Vernazza has one client in the construction business who funded an overseas trust with just $250,000, representing about 25% of his worth. Realistically, you need an amount substantial enough to generate returns that can cover trust costs and still yield a reasonable profit, says advisor Nigel Taylor, owner of Taylor & Associates in Santa Monica, Calif..Only a portion of wealth should be transferred to a FAPT.

While many planners and clients steer clear of offshore trusts, they do offer advantages. "You open yourself up to a whole world of investment opportunity," Taylor says. "Certain investments are prohibited for U.S. citizens, but a foreign trust can buy them."

And, there are cases where having a FAPT proved beneficial. Vernazza tells the story of a client who established a Gibraltar trust in 1993 and lost everything but those assets in a technology-infringement lawsuit several years later. Still, not all are convinced. Trust distributions are discretionary with the trustee, Tobias reminds us. "I have seen cases where people didn't have access to their money in an offshore trust when they wanted it."

Which only goes to show that as with anything else, asset-protection planning should be approached from a cost-benefit perspective. Kochis says that with complex structures, "there are hard dollar costs, sacrifice costs and foregone opportunity costs. Do an analysis of how those trade-off with the potential benefits before you start down a complicated, expensive path that ultimately could be very frustrating to the client. The probability of actual liability is slim," Kochis says. "It's not like (cashing in on) life insurance." Often, simple solutions really are the best.