Asset Protection for the Medical Community
Asset Protection for Medical Professionals. Medical professionals need to protect themselves and their assets in this highly litigious society, even though they have malpractice insurance. Asset protection involves the structuring of assets to preserve and protect their value to the extent possible against potential creditors. This can be accomplished by creating structures for estate and business planning, but also includes other areas of law such as family law, litigation and bankruptcy.
In California, all transfers are subject to the California Fraudulent Transfers Act (“CFTA”). If a transfer is deemed a fraudulent conveyance, a court can void the transaction to allow the creditor to reach the assets. As such, it is important to identify business, investment, and estate planning reasons for establishing the structure.
Estate planning provides planning for assets before those assets reach the beneficiary debtor. It provides the opportunity to maximize asset protection by using trusts to minimize federal estate taxes that can also keep assets insulated from creditors.
The most commonly used and effective trusts are spendthrift all-income trusts and discretionary trusts. Both types of trusts protect the trust assets from the beneficiary’s creditors except to the extent that distributions are made. A spendthrift all-income trust is a trust that contains a restriction on the beneficiary’s right to assign the beneficiary’s interest to creditors. Accordingly, a creditor is limited to the rights held by the beneficiary and cannot attach the trust assets. A discretionary trust provides the beneficiary greater protection by providing that income and principal distributions are to be made solely in the trustee’s discretion. Hence, the beneficiary’s interest in the trust is so tenuous that the property does not qualify as being capable of attachment by a creditor because the creditor must wait until distributions are made. In California, a discretionary trust can qualify for protection from creditors even if it is subject to distribution standards such as health, maintenance, education and support and the beneficiary can compel distributions to satisfy the standard.
Credit Shelter Trust and Marital Deduction. For married couples, credit shelter and marital deduction trusts are generally recommended. At one spouse’s death, the credit shelter trust (also known as the bypass or AB Trust) and any marital deduction trust (a QTIP trust) for the surviving spouse are drafted as protective trusts. The credit shelter trust is employed to protect assets from the surviving spouse’s creditors. In some instances, it is recommended for the first spouse to choose a martial deduction gift to a QTIP trust rather than outright to a surviving spouse. By doing so, the distributions of the principal are discretionary so the principal is protected from creditors. These trusts are drafted as revocable trusts, which do not protect the settlors from creditors because the settlor retains control and because they are self-settled trusts.
Trusts for Children. Trusts can be established for children upon the death of the surviving spouse. These trusts might be spendthrift all-income trusts or discretionary trusts. The asset protection feature ends when the trust terminates and distributes the trust property to the child. Accordingly, the best asset protection is if the child’s trust is established for the child’s lifetime.
Business Structures. Corporations, limited partnerships and limited liability companies are frequently recommended to protect one’s assets. Limited partnerships and limited liability companies can be used in conjunction with trusts for estate planning to reduce potential taxes. Parents can create limited partnerships and limited liability companies to give limited partnership and membership interests to their children, while continuing to manage these entities as general partners or managing members. The limited partnership/ LLC interest gifted to their children receives a discounted value for the value of the gift, thereby removing the assets from the parents’ estates and utilizing less of their federal estate exemption amount. Further, the parents receive a discounted value on their death on the retained limited partnership/LLC interest.
Tredway, Lumsdaine & Doyle LLP assists clients with asset protection and employing the trusts described above to meet the goals of its clients.
