Even though the United States accounts for just 5% of the world’s population, it represents more than 94% of the world’s lawsuits. How is this possible?
Simple. In other developed nations, such as those in the United Kingdom and Western Europe, the losing party in a lawsuit is required to cover the court cost of both sides. This makes both the lawyers and the public less eager to sue without substantive cause. If only credible cases were filed in the United States, its 93 million lawsuits per year would drop to sensible levels as well.
In the medical community, a small percentage of all physicians attract the lion’s share of medical malpractice lawsuits. These physicians, including neurosurgeons, obstetricians, and radiologists, are sued most often because risk exposure is greatest without regard to whether or not the doctor was negligent.
In my experience, doctors like to be right and righteous when faced with lawsuits. But attorneys like to win. Therefore, doctors need to shift their thinking to a protection mind-set to prevent the costs and liabilities of frivolous lawsuits.
During 30 years of prosecuting physicians and now protecting them from litigation, I have learned first hand what can actually save doctors from malpractice lawsuits and what will not. And the answer is surprisingly simple.
The immediate answer is not in tort reforms or other political solutions in which the medical community traditionally places its hopes. But the answer lies in correctly structuring personal and professional assets to withstand lawsuits: a field known today as asset protection.
MYTHS OF ASSET PROTECTION
Popular notions about asset protection, both in and out of the medical field, are often elementary and outdated. For example, some physicians unwittingly put their houses in their spouse’s name not knowing that courts can now consider transferring assets between family members as the basis for fraud in lawsuit proceedings.
Other people think titling assets to a living trust will protect them from lawsuits. In reality, this does little to nothing to shield them from litigation. Some lawyers simply tell physicians to get more liability insurance. This is also a flawed strategy as larger insurance policies often serve as homing beacons for trial attorneys looking for the deepest pockets in which to reach.
PRINCIPLES OF ASSET PROTECTION
Asset protection is a relatively new addition to the legal landscape as an outgrowth of the civil litigation explosion of the past 10 years. But its principles are derived from the tax reduction techniques used by the wealthy and informed since the early 1900s.
Since the inception of income taxes in the United States in 1913, various legal tools have been developed in order to reduce the tax burden on individuals and organizations. Some of these entities include trusts, partnerships, and corporations. When assets are owned in these legal structures, the courts and the IRS treat them differently than if individually owned.
Recently, informed lawyers have been using these tax reduction tools to include lawsuit protection. The most advanced legal tool for reducing taxes and protecting assets today is the Family Limited Partnership (FLP).
FAMILY LIMITED PARTNERSHIPS
In 1916, Congress created the Family Limited Partnership to provide tax benefits and to protect family assets. Today, specialized attorneys have retooled the FLP to include lawsuit protection and estate planning principles. With almost 90 years of case law surrounding it, the FLP has emerged as a tremendously powerful choice for lawsuit-prone professionals to hold family homes, bank accounts, and other assets.
FLPs are structured somewhat like a family business with one or more general partner(s) controlling all of the assets and income distribution of the partnership. The limited partners receive income distributed as determined by the general partner(s) and have no control whatsoever.
For instance, if a lawsuit is filed against a physician and the plaintiff wins, the judge would issue a turnover order in which nonexempt property, including the physician’s home, stocks, bonds, bank accounts, et al, could be turned over to the plaintiff. However, if all of the physician’s property is held within a carefully drafted, asset protection FLP, the law in all 50 states absolutely prohibits any of that property from being seized, sold, or turned over.
In fact, the terms of carefully drafted asset protection FLPs give plaintiffs only one remedy to collect on their judgment, namely, the “charging order.” This means that a judgment creditor’s (or plaintiff’s) only right is to receive distributions from the Family Limited Partnership(s), which are made at the sole discretion of the general partner(s).
Because of Internal Revenue Service Revenue Ruling 77-137, the plaintiff who obtains a charging order against an FLP is required to pay taxes on “phantom income,” which is the income of the FLP, even though the judgment creditor does not receive any income. The result is that the judgment creditors do not obtain any assets or income, but are liable for the tax bill on the income they have not received.
Therefore, disclosure of an FLP to a prosecuting attorney is a great deterrent to the filing and/or settling of a lawsuit against a physician. The FLP has been upheld time after time in court cases across the country.
There is a difference between a plain vanilla FLP drafted for tax reduction purposes and a FLP drafted for lawsuit protection. For instance, most FLPs include weak language surrounding the right of general partners to withhold income from those who sue the partnership. Asset protection FLPs guard against this possibility by strengthening its language with the following clause:
“The General partners may, in their discretion, distribute the profits and/or capital of the Partnership business pro rata’ or non pro rata’ as they deem advisable.”
In other words, general partners may legally withhold their income distributions from plaintiffs or whomever else they please.
By learning asset protection principles, physicians can continue to practice medicine no matter what tort reform is passed.
Disclaimer: This article is written with the understanding that neither the author nor the publisher is engaged in rendering legal or accounting services.
Robert K. Dowd, JD, has been practicing law for 30 years, including several years as a trial attorney for the IRS. He is a speaker for the National Medical Foundation for Asset Protection, Provo, Utah, a for-profit organization that teaches physicians how to protect themselves from lawyers. (800) 296-7009.