Saving for a Rainy Day: What is the Best Asset Protection Plan for Physicians?

If existing case law and legislation is clear and well-developed, then an asset protection plan that falls within the pre-set boundaries should have favorable and predictable results.

The OJ Simpson civil case demonstrates this principle in dramatic fashion. The families of the victims have vigorously pursued collection of a $33 million civil judgment against Simpson for more than 10 years, but they have been largely unsuccessful because a large portion of Simpson’s assets is held in retirement plans that are exempt from judgments. The law specifically protects from collection of the total amount in such plans, as well as any proceeds that are distributed. Published reports are that Simpson had approximately $4.1 million in his retirement plans and draws a benefit of $25,000 per month, completely shielded from the judgment.

Although we’ve seen many similar results in less notorious cases, the asset protection in the Simpson case was well supported by law and withstood persistent and sophisticated attacks from the victim’s families, clearly demonstrating that a protected retirement plan can shelter substantial assets from liabilities and judgments even in the most egregious circumstances. In order to take advantage of the asset protection features of a protected retirement plan, the plan itself must be developed and designed so that it qualifies under the law as an exempt asset, free from potential judgment claims. Because the law varies from state to state and federal law may apply in some circumstances, I’ll provide some general rules and guidelines to which you can refer when discussing the specific details of your case with your attorney.

Qualified plans

One group of retirement plans that is exempt from judgments are the well-known ERISA-qualified plans, such as defined-benefit, profit-sharing, and 401(k) plans. Federal and state law clearly protects the amounts in these plans and any distributions that are made. There may be exceptions for some court-ordered family-support obligations and possibly federal or state taxes, but as a general rule these plans are well-protected from lawsuits and judgments.

One drawback of these plans is that if you have several employees in your practice you may have to make contributions for them also--you can’t just cover yourself in a qualified plan. As a result, the expenses of covering all employees, preparing the necessary filings, and paying for annual administration may exceed the tax- and asset-protection benefits. You should carefully evaluate all aspects of these plans to measure the costs and potential advantages.

Self-employed plans

If you are self-employed and your plan covers only yourself (IRAs and solo 401(k)s), the amount exempt from a judgment varies significantly from state to state. Some states protect the entire amount in these plans while others shield only the amount necessary for “reasonable retirement needs,” a vague and subjective standard that you probably wouldn’t want to rely on. If a big part of your savings is or will be in an IRA, determine with your attorney whether it is exempt from judgments in your state. Also, consider whether the amount of your contribution limits to your IRA is sufficient to shelter a significant portion of your savings.

Private retirement plans

In some states (such as California), the law allows for the creation of a private retirement plan that is entirely exempt from judgments. These plans are highly flexible in design, need not cover other employees, and allow for annual contributions that can substantially exceed those available under the qualified plans or IRAs. Although no tax deduction is available for these contributions, the complete exemption for amounts in these plans may be highly valuable in a wide variety of circumstances and should be considered as a stand-alone asset-protection plan or in conjunction with a tax-deferred account.

Consult with your attorney and tax advisor to learn more about the legal and tax consequences of these retirement plans and which provides the best asset protection value for you.

Robert J. Mintz, JD, is an attorney and the author of the book Asset Protection for Physicians and High-risk Business Owners. To receive a complimentary copy of the book, call 800-223-4291 or visit www.rjmintz.com.