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Your Money By Linda Richelson, Certified Financial Planner
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| How protected are you now? With all of the discussion about medical malpractice insurance problems,
how much do you know about controlling the security of your personal assets? What assets
are protected, and how? What assets are exposed? Let's take these questions one at a time.
What are the threats against your assets? Certain threats are always a concern: taxes, inflation, insurance premiums, investment risk, and the rising cost of doing business. Legal judgments, accidents, illness, theft, or fire are potential threats for which you must also be prepared. How do you build a wall around your personal property to protect it and maintain control? How does insurance protect your assets? Asset protection is something that you have been doing since you bought your first auto insurance policy. Even if the total loss of a car would not be a financial tragedy, the legal judgments stemming from an auto accident could be. In the case of a judgment for $1,000,000 you may pay your $500 deductible, and your auto liability coverage may pay your $250,000 liability insurance limit. But in the face of a million-dollar judgment, with your liability limits exhausted, the $749,500 balance would come out of your pocket—that is, out of your assets. In this case, you could lose control of your assets if you don't have an umbrella liability insurance policy in place. What is an umbrella liability policy? This commonly overlooked policy works as its name implies, as an "umbrella" to cover over the liability limits on your auto or homeowners insurance. These policies are purchased in multiples of $1,000,000 at a cost of less than $500 per million dollars of coverage. In our example, your umbrella liability policy would pay the $749,500, helping you maintain control of your assets. Auto, homeowners and umbrella liability insurance are the first line of defense in protecting your personal assets against the most common threats. The issue here is usually not the financial loss of the house or the car, but the far greater potential loss of other personal assets, future growth of those assets, and/or future income. Your control over your assets can be improved by the quality of the construction of these contracts. How does my disability insurance help protect my assets? Your assets are likewise protected from loss by a well-designed disability income and disability overhead expense policy. Money to replace lost income is provided during disability by the insurance company. This avoids the necessity of tapping into personal assets to cover personal or business expenses. Health insurance functions similarly. How is control of your assets determined? Most of your assets are controlled either by contract (such as an insurance policy), by statute or law, or by the ownership arrangement of the asset. Examples of assets protected by law, in the State of Florida, include the death benefit and cash value of permanent life insurance and the value of your primary residence. These assets are protected from creditors and legal judgements under most circumstances. Federal law protects the life insurance death benefit and cash value from income taxes. The death benefit itself protects your other assets from use as income upon your death. Federal and State law protects certain retirement annuities and qualified retirement accounts from creditors, legal judgments, and from taxes, during their growth. To the extent that your insurance policies are well constructed, and that your money is residing in qualified retirement plans, annuities, life insurance, and your primary residence, you're in control of your assets. These are all assets that are protected by contract, law and/or ownership arrangements. How do you control assets that are not otherwise protected? Many assets that are personally and individually owned outside of a qualified retirement plan (e.g., stocks, bonds, mutual funds, savings accounts, certificates of deposit, government securities, and real estate other than your primary residence) are often exposed to loss by many of the threats we've touched on here. To maintain control of these assets—assets that may not have protection by law, contract or ownership arrangements—and for advice on how ownership arrangements can offer protection, specialized attorneys should be consulted. The rising cost of doing business for the physician is a serious threat to the growth of the physician's assets. Also, there are limits on the amount of income that can be used in the formula for maximum allowable pre-tax contribution to qualified retirement plans. The combination of these factors makes it important to study alternative ways to build assets safely for the physician's future. A technique that both leverages and protects the value of the collectable accounts receivable of the physician's corporation is sometimes useful to supplement the physician's retirement account. The physician's corporation borrows funds from the bank in the amount of the value of the physician's collectable accounts receivable. The money is transferred to the physician by the purchase of annuities and life insurance. This allows the growth of a protected asset, in the physician's ownership, for the future. The corporation pays "interest only" on the loan until retirement, when the physician gets the asset and its growth. The accounts receivable are collected to pay off the bank note. A consequence of this technique, a lien placed by the lending institution against the assets of the corporation and the investment vehicles given to the physician, could preclude any other claim against the corporate assets and the investment vehicles. Control over your assets can be achieved by attention to the details of the contracts, laws and ownership arrangements that provide the structure for your financial plan. The quality of the construction of your financial plan will make the difference between maintaining or losing control of your wealth. Because the security of your family and your practice is important to you, it's always best to use qualified professionals in preparing and reviewing your financial plan.
November-December 2002 / Jacksonville Medicine
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What's New
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Northeast Florida Medicine Journal ·
Know Your Physician
· Legal
& Legislative
Duval County Medical Society
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555 Bishopgate Lane
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Jacksonville, FL 32204
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