By: Larry J. Laurent, Attorney at Law
Chiropractors are being targeted for state and federal investigations as well as lawsuits more than ever before. Professional liability insurance can protect a doctor from the consequences of an honest mistake. Also, coverage for defense costs enables a chiropractor to defend expensive claims of questionable merit. While professional liability insurance is an indispensable tool in the practice of chiropractic, not all malpractice claims fall conveniently within the policy limits of a chiropractor’s malpractice policy. Moreover, suits against chiropractors are not always limited to claims which are covered by a chiropractor’s malpractice policy. Allegations of fraud or dishonesty are common yet are excluded from coverage under most chiropractic professional liability policies, although “innocent associates” may be covered. Threats against a chiropractor’s personal assets also derive from risks outside the chiropractor’s practice. In fact, the most common threat to a chiropractor’s net worth seems to be claims from failed investments or from causes of action not covered by general liability insurance.
Every chiropractor, regardless of the chiropractor’s net worth, should consider the benefits of proper business organization and asset protection planning to protect his or her financial well being. Unfortunately, most chiropractors do not consider the benefits of appropriate business planning or an asset protection until it is too late. Timing is everything in business planning and asset protection. Generally speaking, proper business organization and asset protection should be used to protect against potential future creditors. Proper business organization and asset protection planning is not an excuse to defraud existing creditors — use of otherwise legitimate asset protection techniques to defraud existing creditors will, in most cases, fail outright, and in the worst case, result in potential criminal liability. Thus, a chiropractor should evaluate business organizational plans and asset protection options before a potential claim arises.
For a chiropractor, the point of beginning for any asset protection plan is the chiropractor’s practice itself. Many chiropractors continue to practice chiropractic as unincorporated sole proprietorships or as part of a loosely organized general partnership. While properly organizing a chiropractic practice in a corporate or limited liability partnership/limited liability company format will not protect a chiropractor against his or her own malpractice, it will protect his or her personal assets from business mistakes and liabilities. Chiropractors practicing independently or together may form a partnership/limited liability company, limited liability partnership or a corporation (professional or business) to protect their personal assets from the malpractice or errors of their chiropractic partners. Proper business organization and asset protection can also help insulate chiropractors from the vicarious liability of their employees.
On a personal basis, many forms of simple but effective asset protection plans are available to shield a chiropractor’s personal assets from future risks. For example, federal law protects a participant’s interest in any employee retirement plan that is regulated by the Employment Retirement Income Security Act, commonly known as ERISA, while state law protects most other retirement plans. By contributing a portion of the chiropractor’s income and savings into a protected retirement account, the chiropractor can obtain a significant tax deduction for his/her contributions while simultaneously building a retirement fund which is protected from future creditor claims.
The ability to invest assets protected from potential future claims can also be found in state laws. Texas is well known for its liberal homestead exemption which exempts a person’s homestead from virtually all creditor claims except for taxes and purchase money liens, regardless of the value. A chiropractor who is desirous of protecting accumulated earnings may reduce the mortgage on the chiropractor’s homestead thereby increasing the amount of “sheltered” equity in the property.
Another common and legal form of asset protection is simply to transfer property into the name of its intended beneficiaries. For example, cash and marketable securities can be transferred to the chiropractor’s minor children under the Uniform Gifts to Minors Act. Alternatively, the chiropractor can transfer assets into a domestic trust which is earmarked for the benefit of his or her minor children. Such an arrangement is ideal for building a college fund for the chiropractor’s children which, if properly structured and operated, will be protected from the chiropractor’s future creditors.
While domestic trusts continue to be popular, the family limited partnership has become a favorite of many estate planning and asset protection practitioners. There are many asset protection benefits associated with the use of a family limited partnership. By transferring assets into a family limited partnership, the chiropractor can gift interests in the limited partnership to family members while still retaining control over the assets of the partnership as general partner, Substantial gift and estate tax benefits may be available using such an arrangement. The chiropractor can retain as little as a 1 percent interest in the partnership, transfer the remaining 99 percent interest in the limited partnership to his children or other family members and protect the transferred interest from the claims of the chiropractor’s future creditors. Yet, the chiropractor would be able to retain control over all of the transferred assets in his capacity as general partner, something he/she generally cannot do if using a domestic trust.
Unfortunately, while domestic trusts
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work well to shelter assets transferred for the benefit of the chiropractor’s children and other family members, they will not work to protect any beneficial interest retained in the trust by the chiropractor. In other words, the chiropractor cannot benefit from assets transferred into a trust and still protect that asset from future creditor claims. For example, in Texas, this rule against a “self-settled trust” is found in the Texas Property Code. It provides that “if the settlor is also a beneficiary of the trust, a provision restraining the voluntary or involuntary transfer of his beneficial interest does not prevent his creditors from satisfying claims from his interest in the trust estate.” However, this limitation can be avoided legally by establishing the self-settled trust in an offshore jurisdiction that does not contain such prohibitions. The use of offshore trusts ensure maximum legal protection of a doctor’s personal wealth has gained new recognition and acceptance in today’s litigious society. Historically, offshore trusts have not enjoyed generally widespread acceptance in the health care community. To many, an offshore trust is something used only when someone has “something to hide.” However, much of this criticism is based upon myth or a lack of understanding of how or why a legitimate offshore trust works. For example, offshore trusts are often thought to succeed because of the strict secrecy found in many offshore jurisdictions where such trusts are formed. However, the offshore planner who establishes a legitimate offshore asset protection trust has no need for secrecy laws.
There are many advantages to going offshore to seek asset protection. By using the laws of the foreign jurisdiction, the chiropractor can access the best legal protection available to fulfill the chiropractor’s goal of effective but legitimate asset protection. Many offshore jurisdictions have adopted legislation specifically designed to offer the maximum amount of protection to the settlor and the assets transferred to a trust by the settlor. For example, almost all offshore jurisdictions will permit a settlor to establish a self-settled trust without subjecting such interest to the claims of future creditors. The settlor is thus allowed to retain beneficial enjoyment of assets transferred into the trust and even retain some control over the assets for the benefit of the chiropractor’s family, Although it is typically a better planning strategy to avoid any unnecessary control on the part of the settlor, the fact that the settlor has retained a beneficial interest in the trust or has a right to exercise certain defined powers in the trust has, in many jurisdictions, been expressly permitted by statute. Many options and strategies are available to a chiropractor to shelter personal assets against the uncertainties of the ever increasing litigation risk in today’s litigious society. With careful planning in selecting and establishing the proper business organizational format for his/her business practice, as well as an appropriate asset protection plan, a chiropractor should be able to take steps to shelter his or her net worth to insure it is available for the chiropractor and the chiropractor’s family when it is needed.