Asset protection made easy sounds like an impossible task, but Dr. Jim Dahle has set out to demystify this potentially complex topic with The White Coat Investor’s Guide to Asset Protection: How to Protect Your Life Savings from Frivolous Lawsuits and Runaway Judgments.
There are several components to a sound asset protection plan, and luckily, you’ve almost certainly got some of them in place based on what’s legally required of you and the types of investment accounts available to you.
Along with estate planning, asset protection is one of those areas peripheral to investing that is not a strong suit of mine. Both can be done in either a simple manner or an incredibly complex one, and both should be in place years before they might be needed.
I’ll share an overview of Dr. Dahle’s latest book and what changes I may implement based on what I learned while reading it.
The White Coat Investor’s Guide to Asset Protection consists of 8 chapters, a few case studies, a glossary, and just over 200 pages.
Chapter 7, State Asset Protection Laws, is a state-by-state breakdown of the most pertinent laws for all 50 states and the District of Columbia. More than half of the book’s content is in this chapter.
If you skip over the 98% of places in which you don’t live, this is about a 100-page book that you can read in a couple of hours. It’s well worth your time.
Since this volume is aimed primarily at physicians, Dr. Dahle takes a good look at the likelihood of losing your personal assets to a malpractice judgment against you. Good news! It’s extremely unlikely.
While it is stressful to be named in a malpractice suit — it happened to Dr. Dahle twice in his first months as an intern — most lawsuits result in neither a settlement or judgment against the defendant. Thankfully, I was never named in a malpractice suit, and the one lawsuit in which I was a defendant — which resulted from my volunteered time on the Hospital Board — “only” cost me lawyer fees and a few years of angst.
Some medical specialties are high-risk for lawsuits, namely surgeons and obstetricians, whereas pediatricians and psychiatrists see relatively few lawsuits. My specialty, anesthesia, and Dr. Dahle’s specialty, emergency medicine, are right in the middle.
The studies on the topic vary, but only about 20% of patients who sue for medical malpractice actually receive any money, and a small percentage of those come from an actual trial. The rest are settled out of court, sometimes via mediation or arbitration.
When harmed patients receive a payout, it’s almost always within the limits of one’s malpractice policy maximum.
Based on the data, Dr. Dahle calculates his risk of making an out-of-pocket payment to a patient as a 0.4 FTE emergency physician at 3 per 100,000 years of practice and the odds of paying more than $250,000 out-of-pocket at 1 per 100,000 years of medical practice.
Do not go bare (forgo malpractice insurance), carry an amount that is common (low seven-figure policies are typical), treat patients respectfully, apologize when things don’t go according to plan, and try not to let this risk keep you up at night.
The chances of actually losing your personal assets due to a medical error is vanishingly small.
Love and Marriage
The risk of losing your assets to an ex-spouse is infinitely higher.
One way to mitigate this risk is to never marry, but it’s not a path Dr. Dahle recommends, nor do I, but you do you.
What you ought to do, if you choose to marry, is to be on the same page as your partner when it comes to spending, saving, and investing. Pre-marital counseling can be helpful in this arena.
There is some discussion of pre-nuptial and post-nuptial agreements. Neither he nor I have these, but there are benefits to having them in place in the event that the marriage does go south. Also, if there is a big mismatch in what two partners bring into a marriage in terms of assets or debts, it may be wise to set some financial parameters before tying the knot.
If you have children, and those children learn to drive, they represent a risk to your assets every time they depress the accelerator. Dr. Dahle recommends getting them off of your auto insurance policy when they turn 18, even if it costs you (or them) more to buy them a separate policy.
You can also re-title your children’s primary vehicles, if they have any, in their names rather than yours to reduce your potential liability. It never would have occurred to me to make these moves.
In the introduction, I mentioned the fact that you’ve already got some asset protection in place as mandated by law. For example, your vehicles must be insured, and your state’s laws typically require some liability insurance.
Rather than choosing the minimum, a high-income, high-net-worth individual should generally choose as much liability protection as possible. This is true of both auto and homeowners insurance.
Umbrella insurance can cover personal liability above and beyond what your auto and homeowners policies cover, and it’s usually purchased from the same company, giving you a multi-policy discount on each of the three policies.
Dr. Dahle torpedoes the fallacy that your umbrella policy limits should reflect your net worth. Rather, it should reflect a reasonable expectation of the most you might be successfully sued for. You’re not McDonalds with billions of dollars and scalding hot coffee. You’re a hard-working professional that most people still respect. An 8-figure judgment against you in a civil court is just so unlikely unless you do something beyond egregious.
Finally, if you are a business owner or rental property owner, placing those assets in Limited Liability Companies (LLC) is wise, and there are insurance policies specific to those entities that should be in place.
So far, we’ve chosen to practice sound medicine without too much worry, marry well or not at all, and insure against most personal liability. What else can be done to protect your assets from a lawsuit or bankruptcy? Chapter 5 introduces “Cheap, Easy, and Effective Asset Protection Strategies.”
Tenants by the Entirety
Some states allow you to title assets as belonging to two spouses as “joint tenants by the entirety.” When this is done, the asset cannot be taken unless both you and your spouse have a judgment against you.
In Michigan, I can title my property this way but not our bank or brokerage accounts.
Max Out Retirement Accounts
Employer-provided retirement accounts governed by the ERISA act of 1974, including 401(k), 403(b), 401(a), SEP-IRA, SIMPLE IRA, cash balance plans, and pensions, are protected from bankruptcy and any creditor not named The IRS.
Max them out for optimal asset protection.
There’s a long list of exempt items that the federal government will let you keep on pages 43 and 44. States can go above and beyond what’s on that list.
For example, the Feds only protect $1,362,800 of your IRA or Roth IRA money, but Michigan protects 100% of these accounts.
529 contributions made at least 720 days ago are protected, as is another $5,000 contributed within the last 720 days. That’s roughly two years; I have no idea why they chose 720 days specifically, but they did.
The feds have some quirky exemptions, but the states have some exceptionally fun ones. In Michigan, the following are protected from confiscation in the event of a judgment against me:
- 6 months of food and fuel. Gotta keep the pontoon running and a pantry full of Cheetos!
- A single church pew. No mention of whether or not that includes the padded kneeler. I pray that it does.
- $1,000 in household goods. In other words, a mattress and a half. Maybe more on Prime Day (which is today and tomorrow if you’re reading this 7/12/2022)!
- 10 sheep, 2 cows, 5 swine, 100 hens, and 5 roosters. I like your odds, roosters.
- $1,000 worth of tools. I’ll need them to build fences for my plethora of livestock.
In some states, all of your home equity is exempt and cannot be taken. If this is the case in your state, you might buy more home than you otherwise would and pay off the mortgage more aggressively.
In Michigan, a measly $3,500 in home equity is protected, but we can opt instead for the federal exemption of $25,150. If asset protection is a primary goal, some “equity stripping” could help our cause. This means borrowing against the value of the home and investing the money in an asset-protected manner.
With the simple and easy stuff out of the way, Dr. Dahle covers the more complex and costly methods of asset protection. There is some overlap with estate planning with some of these options.
Giving money away is one way to ensure the money can’t be taken from you, but that’s a lousy method of “protection” if you’re truly giving it to another person or organization.
A more common method of protecting assets while transferring them to another entity is to set up an irrevocable trust, and there are many types of trusts. A few are summarized in the book, but don’t expect an in-depth discussion comparing and contrasting the dozens of possibilities.
He touches on the Irrevocable Life Insurance Trust (ILIT), Intentionally Defective Grantor Trust (IDGT), one of which is a Spousal Lifetime Access Trust (SLAT), and the Domestic Asset Protection Trust (DAPT).
The latter gets the most attention, although there is a case study that sounds a lot like Dr. Dahle’s situation at the end of the book where a SLAT is employed. He’s also got a blog post (linked to in the Additional Resources Section with an SQR code) that goes into greater detail on the SLAT and how he set one up for his family and business.
The book tells me that Michigan is a DAPT state, and that a DAPT could be a good type of trust to hold our primary home once it’s built. Our taxable brokerage account could also be transferred to a DAPT, and I could also be both the grantor and beneficiary of the trust (but not the trustee), carrying out tax loss harvesting, and the rest of it in the entity that is a Domestic Asset Protection Trust.
Foreign Asset Protection Trusts, the most popular of which seem to be on the Cook Islands, in Belize, and in Nevis, get a handful of paragraphs. I doubt these are for me, but there is an odd appeal to being able to say I have assets tucked away on the Isle of Man or Liechtenstein.
Putting everything in your spouse’s name is another technique, although not a sophisticated or recommended one, that some choose to employ. It won’t do you any good in a community property state (AZ, CA, ID, LA, NV, NM, TX, WA, WI) and it could be disastrous if your spouse leaves you with all the assets in his or her name.
A few pages are dedicated to Family Limited Partnerships and Family Limited LLCs. The latter sounds preferable. Like many of the above hard-mode strategies, I feel that these are for households with a multiple 8-figure net worth and/or a potential estate tax problem.
Chapter 8 consists of practical advice for the typical doctor.
I’ve been protected by malpractice insurance, and in most cases, I’m beyond any statute of limitations, having not seen an operating room in nearly three years
I’ve got umbrella insurance, and my business is inside an LLC. I’ve maxed my retirement accounts every year. So far, so good!
Thanks to this book, I’ve done #6 — Learn Your State Laws, although I may want some clarity from an attorney on the finer points of a DAPT and which assets can be titled as joint tenants by the entirety.
For #7, I’ve calculated my unprotected assets, and with a 7-figure taxable brokerage account and a 7-figure home being built, there’s a decent amount there. A DAPT or two may help with asset protection, and I could also do some overdue estate planning as part of the same conversation with an attorney who handles both.
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If you’re ready to get started with some basic asset protection strategies, get your copy of The White Coat Investor’s Guide to Asset Protection. Learn your state’s laws, do the simple stuff, and worry about hard mode when you’ve got millions of dollars potentially at risk.