I.      Selecting the Right Legal Entity

 

A.     Under general partnership law, a partner is jointly and severally liable for acts of malpractice committed by a partner in the same partnership.

 

B.     By conducting a medical practice through a corporation or limited liability company, a shareholder/member physician is not liable for acts of malpractice committed by other shareholder/member physicians in the same practice.

 

C.     Forming a corporation or limited liability company does not protect the personal assets of the shareholder/member physician who commits the act of malpractice; that is, you are still personally liable and your assets are exposed when you commit the act of malpractice.

 

D.     To date, there is no meaningful distinction from a liability protection standpoint, between a corporation and a limited liability company.

 

II.     Selecting the Right Medical Malpractice Insurance Carrier.  Worth a discussion with your insurance agent.

 

III.    Assets that are Exempt from Execution

 

A.     Necessary apparel, furniture and appliances.

 

B.     Tools, books and instruments that are necessary to the practitioner in the course of his or her occupation.

 

C.     Social security, veterans and unemployment benefits.

 

D.     One motor vehicle with a value (net of liabilities) of up to $1,500.00.

 

E.     Wedding and engagement rings.

 

F.      Assets in a plan or arrangement described in Section 321a of the Connecticut General Statutes, including:

 

1.     Retirement plans established under Internal Revenue Code (“IRC”) Section 401; including 401(k) plans and simple retirement plan accounts.

 

2.     Individual Retirement Accounts and Simplified Employee Pensions (SEP IRAs).

 

3.     Roth IRAs.

 

4.     Coverdell IRAs (f/k/a “Education IRAs”).

 

5.     Medical Savings accounts established under IRC Section 220.

 

NOTE: Currently, assets in Section 529 plans are not exempt from execution!!!

 

G.     Interest in any property not to exceed $1,000.00.

 

H.     Interest of practitioner in any unmatured cash value life insurance contract not to exceed $4,000.00 in value.

 

I.      Value of equity in practitioner’s homestead (principal residence) up to a maximum of $75,000.00 as measured by the difference between its fair market value and the outstanding balance of all statutory and consensual liens.

 

IV.    Ownership of Assets by Spouses

 

A.     Assets that are solely owned by a spouse of a practitioner cannot be attached by a judgment creditor of the practitioner.

 

B.     Unlimited marital deduction permits lifetime transfers of assets to spouses without any adverse federal or State of Connecticut gift tax consequences.

 

C.     Be careful of the Uniform Fraudulent Conveyance Act which prevents a practitioner from transferring assets to a spouse to protect the transferred assets from a known creditor (previously filed lawsuits).

 

D.     Be careful not to void prenuptial agreements or create marital rights to “separate property” such as inherited assets.

 

V.     Irrevocable Trusts.  The maximum property interest available to the Settlor of an irrevocable trust will also be available to satisfy the claims of the Settlor’s creditors.

 

A.     Irrevocable Life Insurance Trusts (“ILITs”).

 

1.     An estate planning tool.  Life insurance policy is obtained through an irrevocable trust; that is, the trust is the owner and beneficiary of the insurance policy.

 

a.     When the insured dies, the Trustee of the Trust collects the death benefit and distributes the death benefit to the insured’s beneficiaries who take the proceeds free from income and estate taxes.

 

NOTE:       Regardless of how a life insurance policy is owned, the beneficiary of the policy generally receives the death benefit income tax free.  However, the full amount of the death benefit is included in the estate of the owner/insured of the policy upon his or her death.  The estate planning benefit of the ILIT is that the Trust is the owner of the policy, and therefore, the death benefit is not included in the estate of the insured upon death.  In other words, the death benefit can pass to the insured’s intended beneficiaries entirely free of income and estate taxes.

 

b.     If an existing policy of life insurance on the life of a person is transferred by that person into an ILIT, the person must live for three (3) years from the date of transfer to successfully exclude the policy proceeds from his or her estate.

 

2.     An asset protection tool.

 

a.     The ILIT is irrevocable; that is, the person who sets up the trust cannot revoke the trust or ever take back property conveyed into the trust.

 

b.     Therefore, assets of the practitioner which are owned by an ILIT are generally not subject to the claims of creditors of the practitioner.

 

B.     Marital or QTIP Trusts.

 

1.     Assets are often transferred to a practitioner’s spouse for estate planning and asset protection purposes.

 

2.     If the practitioner’s spouse predeceases the practitioner, the spouse’s assets can pass to a marital trust which will provide income and discretionary principal to the practitioner for life but will be protected from the practitioner’s creditors.

 

C.     Domestic and Offshore Asset Protection Trusts.

 

VI.    The Use of Limited Liability Companies (LLCs) to Protect Assets

 

A.     LLCs are superior to corporations from the standpoint of protecting assets from creditors.

 

1.     The LLC limits the creditor’s rights to the assets owned by the LLC to what is known as a charging order.

 

a.     Upon application by any judgment creditor to a Court with jurisdiction, the Court may charge a member’s LLC interest with payment of the unsatisfied amount of the judgment with interest.  To the extent so charged the judgment creditor has only the rights of an assignee of the member’s LLC interest.

 

b.     An assignee of a member’s LLC interest is entitled to receive only the distributions to which the assignor would be entitled.  The LLC is not dissolved and the assignee has no right to participate in the management of the LLC.

 

NOTE:       The statutory rights of creditors of partners of general partnerships in Connecticut governed by the Uniform Partnership Act are broader than the rights of creditors of members of a Connecticut LLC.

 

2.     Generally, LLCs are superior from a taxation standpoint.

 

a.     Tax free contribution and withdrawal of assets (subject to certain exceptions).

 

b.     LLCs with more than one owner/member are generally taxed as a partnership, which is never subject to two (2) levels of income taxation.

 

B.     LLCs can now be established by a single owner.

 

C.     LLCs can be used in a variety of contexts to protect assets.

 

1.     The medical building you own with your partners (transfers in are no longer subject to conveyance taxes).

 

2.     Rental properties.

 

3.     The vacation home.

 

4.     Taxable or nonqualified investment accounts.

 

5.     Stock in closely held corporations.