Practically Bullet Proof–Asset Protection Strategy for Professionals

Regardless of the limited liability entity they practice under, professionals are always personally liable for their malpractice. Yes–you heard right–as a professional, your personal assets are exposed to your professional liability. In light of this critical fact, professionals are often compelled to acquire excessive malpractice insurance in order to hedge against the risk of personal liability. Yet often overlooked, is a practical asset protection strategy for professionals; in particular, professionals may protect personal assets by placing them into an LLC.

Take for example a physician who has a general practice with malpractice insurance that provides for a $10 million policy. Further, let’s assume the practice itself has assets totaling $1 million. In the event of a lawsuit for malpractice, the professional corporation would not shield the doctor’s personal assets (this is unique to professional services–lawyers, physicians, accountants, etc.). In the event of a $20 million judgment, the $10 million insurance policy and $1 million of business assets would be exhausted first, thus leaving a $9 million deficiency. The $9 million would then be satisfied from the doctor’s personal assets. If the doctor had a few real estate investment properties–surprise–they are subject to attachment and forced liquidation. So how can you prevent this extensive financial loss; I mean, isn’t it enough that the doctor’s practice was completely dissolved and used to satisfy the judgment?

Unfortunately, if you’re a professional, these are the cards you’ve been dealt. However, it’s not about the cards you’re dealt, but how you play your hand. One way to play this hand is for the doctor to increase his insurance policy to $20 million; of course, in addition to the added expense, there is no guarantee that this coverage will be sufficient in every scenario (i.e., $23 million verdict). That said, if your going to play your hand you might want to consider placing your personal assets into an LLC, in particular, a Delaware LLC.

A Delaware LLC prevents judgment creditors from forcing a liquidation of the business assets and instead forces them to seek a “charging order” which makes them wait for the LLC to pay out distributions (For a detailed discussion, see my segment on LLC Protection from Personal Liability). As a practical matter, the charging order is toothless because the LLC has discretion to make distributions. Because the member of the LLC (the doctor) isn’t obligated to make distributions, the creditor must sit on his heels and wait. This hassle factor either eliminates the pursuit by the creditor or gives the doctor leverage to settle for a smaller amount. Accordingly, if the doctor were to place his investment properties in an LLC, he would effectively prevent the judgment creditor from using the LLC assets to satisfy the judgment. Of course, if the investment property were held in the doctor’s personal name or in a separate corporation, the property would still be subject to liquidation. In light of this, it would be wise for professionals to place earning and distributions from their practice and personal ventures into an LLC.

It should be noted that depending on the specifics of your assets, it may also prove to be tax favorable to choose a Delaware LLC with S-corp taxation.

And that’s it folks, no need to put your assets in an offshore account, this is the practical cost effective approach to asset protection for professionals.