Lock Down Your Asset Protection Strategy

What a difference a few short years can make.Throughout the latter half of the 1990s, physician-investorswere riding a bull market to new heights andbuilding wealth with relative ease. Today, however, afterlosing perhaps 30% to 50% of their assets, investorshave come to recognize the importance of protectingthose assets. "More people are concerned about protectionof principal than they are with yield,"explainsRichard Rubino of Rubino & Liang, LLC, a Newton,Mass-based financial consulting firm. "They are willingto give up yield for that protection."

But fears of a market downturn are not the onlythings driving physician-investors into an asset protectionmode, according to Gary Garland, Esq, ofGarland & Ehling, LLC. A highly litigious societycombined with rising malpractice insurance premiumshas significantly heightened concerns. "People thinkthat because the planets didn't align, they're entitled tomoney,"Garland says. "If someone gets a paper cutthey want to sue the book publisher, so you have to beleery. Physicians are the poster children for asset protection.They're the ones who are more likely to besued than any other walk of life."

Avoid Emotional Decisions

Sam Liang of Rubino & Liang, LLC, points outthat during the 1990s investors made decisions withtheir emotions, particularly greed. Then, between2000 and 2003, the average American lost half of theirnet worth. The problem now, Liang says, is thatinvestors are making asset protection decisions withtheir emotions. "I read a study recently that about$1.5 trillion moved out of the stock market and intobank accounts,"Liang recalls. "People didn't do thatin order to get 1% on their savings account. They didit out of fear of losing more money."

As an example, Liang points to a 57-year-old physicianwho had married a woman 10 years his junior. It'sa second marriage, and the couple has children, so thephysician is concerned about providing for his retirementas well as making sure there's enough money forthe family. Like many other investors, the physicianhad done well by investing in a lot of high-tech stocksand mutual funds. Then, he saw his IRA fall backfrom $2.5 million to about $1.5 million. "He keptwatching it, saying it would come back, but it onlywent down more,"Liang recalls.

The physician's response in late 2001 was to takeall his money and put it into a money marketaccount, where he was earning about 1.5% to 2%.The problem was that he ended up missing the entireupside of 2003 when the S&P went up approximately28.7%. "So now he's about 70% of Americanswho made investment decisions out of greed and fear,rather than facts,"Liang says.

And the facts, Liang points out, are that the investmentworld, from mutual fund companies to insurancecompanies, has stepped up and provided products thatinvestors can put their money in that place emphasis onsafety over yield. "In the past, investors have concentratedon asset allocation and building wealth,"Liangsays. "Today it's more about preserving wealth andguaranteeing principal. And with old-fashioned productslike a mutual fund, you can't do that."

The upside of these products is that they protectinvestors'money, offer some guarantees, and evenallow you to lock in some of the gain that you'veearned. The con, however, is that you can say goodbyeto the double-digit returns you experienced in the1990s. But, as Liang points out, "It's better not togain anything than to lose something."

New Income Concept

Rubino and Liang introduced the above-mentionedphysician to the concept of using a fixed indexannuity, where the physician put his remaining $1.5million into a fixed index annuity account, where itwill never be less than $1.5 million. The physicianalso has the choice to link his returns based on a particularindex. If the $1.5 million is invested today and1 year from now the market goes up 10%, the maximumgain the physician can receive is 7%. If themarket rises 6.29%, the physician receives the entire6.29%. If the market rises 7.5%, the physician receives7%. But if the market falls and has a negativereturn of 15%, the physician simply breaks even. "Soheads he wins, tails he breaks even,"Liang explains."He can never lose money."

An additional benefit is what Liang calls the secondchance in life. "We've all experienced this,"Liang explains."We buy a mutual fund or stock for $100,000,it goes up to $130,000 in 2 months, but then somecorrection happens and it falls to $90,000, and we justwatch it go down. But with this index account, eachyear, whatever gain you've made is automaticallylocked in. You don't have to sell or do anything. Gainsare automatically locked in and become principal."

For example, if you invest $100,000 and it goes up7% to $107,000, after the first year that becomes yournew principal going into the second year. If your neighbordid the same thing but invested in a mutual fundand the market falls in the second year, your neighbor'saccount may drop to $85,000, so in the third yearthey're starting from $85,000. Your principal, however,stays at $107,000, so if the market goes up in thethird year, you're working off a higher base.

"This might sound simplistic,"Rubino points out,"but the most important thing when it comes toinvesting is to not lose money. So if you continuemoving forward, even if it's at 3% or 4%, it's betterin the long run than losing money, especially if you'reseeing the light at the end of the tunnel and planningan exit strategy from the working world. You're inthe home stretch. To go backwards is devastating."

Asset Protection Trusts

In January 2004, an asset protection trust law tookeffect in Utah, enabling people to put money in an assetprotection trust in the state. The trust document isdrafted in such a way that creditors cannot gain accessto the money. Since then, other states—includingOklahoma and Alaska—have joined the party, puttingsimilar trust laws on the books. However, numerousfinancial advisors question whether this is the bestroute to take when it comes to asset protection.

"Asset protection trusts have become more popular,and we've seen more states introduce them,"explains Mark Periard, an attorney with Michigan-basedWarner Norcross & Judd. "My firm sat downand looked at Oklahoma's law. In that one, all theassets had to be Oklahoman assets and had to bemanaged by an Oklahoman manager. Plus, it wascapped at $1 million. In effect, you end up with avery state-focused approach in some cases."

John Dietz, senior advisor with Trustmakers FinancialServices in New York, cautions that these state-basedasset protection trusts are relatively new and, assuch, are untested. "We operate under the pretense thata physician-investor is literally in front of a judge andjury, or at a debtor's exam, and then we work backwards,"Dietz explains. "In other words, these productshave to hold up or we're not doing anyone anygood. I wouldn't recommend going to Utah to open atrust because nobody knows what a judge in Utah isgoing to do. People are promoting Alaskan trusts, butnobody knows what the end result will be there either."

Garland says he has heard that Alaskan trusts aresupposed to be second to none, but he believes that ifyou want the most asset protection you can get out ofa trust, you have to go offshore. "You want a jurisdictionthat does not have comity with the United States,"he explains. "Popular destinations have been the CookIslands, and Nevis has become the latest darling."

But the key to asset protection, Garland says, istransparency. He explains that you can't hide anythingyou've done. If you do, you'll go to jail. "People thinkyou can take money, put it under the bed, and you'resafe, but that would potentially be a fraudulent conveyance,"Garland explains. "On the other hand, youtake the money, park it offshore, and check the appropriatebox on your tax return, then creditors can see it,but they can't get to it. You're not hiding the money,you're just moving it to a more favorable jurisdiction."

Additional Strategies

Periard says that one of the best asset protectionstrategies, and the simplest, is titling things appropriately.He tells the story of a nanny who worked for awealthy investor. The nanny was driving the investor'schildren around and talking on a cell phone when sheran through a red light, crashed into a family, andkilled three people. And in Michigan, where the incidentoccurred, both the driver and owner of the vehicleare liable. "You look at who's on the car title, andguess what?"Periard asks rhetorically. "Husband andwife are both on the title. Now all their assets are injeopardy."Periard explains that there are laws in placeprotecting an individual's retirement plan assets andlife insurance benefits, but other assets are vulnerableto creditors if not properly titled.

Garland echoes those thoughts. He explains thatfamily limited partnerships and, more recently, familylimited liability companies (FLLCs) are receivingincreased attention. The main idea here is to insulateassets from other assets. "An investor I know hasvarious properties in a variety of locations, some indifferent states,"Garland explains. "Each of thoseproperties should be in a separate LLC. It's not aboutaggressively pursuing estate tax reduction, it's aboutasset protection. If you put all the properties into oneLLC, it becomes a domino effect. If a creditor can getto one of the properties, he can get to all of them. Ifyou insulate the assets, you might lose one property,but it won't affect the others."

Garland suggests that for physicians who own thebuilding in which they're practicing, it's a good ideato have the building in a separate entity from thepractice. If properly structured, the practice wouldthen pay rent to the landlord, which is basically thepractice itself, just the other pocket. The same can bedone with medical equipment. "You put the equipmentin another company and make lease paymentsto that entity,"Garland says. "You want to insulateeach asset that's appropriate."

Remember that an asset protection strategy, likeany other financial plan, needs to be reviewed andupdated regularly. "It's important to review on a continuingbasis,"Liang says. "You can't wait until theend to try to fix the problem. The easy fixes are doneby tweaking things along the way."Therefore, whenit comes to asset protection, establish a relationshipwith someone you trust who can react to changes incircumstance, whether the changes are financial,medical, or legal.