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.