In this vein, and fueled in part by such media attention, a common perception has developed recently that physicians have financially deep pockets that are available in matters of controversy. It is no secret that we live in a litigious society, in which malpractice claims against physicians continue to increase at an alarming rate every year. As such, many physicians have turned to very basic asset protection strategies as a means by which to protect personal assets from the claims of litigants and other creditors.

The most common technique employed by physicians to protect assets involves the simple purchase of malpractice insurance. As many physicians know, however, insurance carriers are taking an increasingly critical approach to claims that arise in a malpractice setting. The focus of such a critical review is to determine whether the carrier is responsible for the claim in question. In many cases, the result of this approach is a determination that, in fact, the carrier is not responsible for the claim in question, leaving the physician financially exposed. For example, such a result may emanate from the provisions of the insurance contract, which may not cover the asserted claim. Conversely, while the claim may be covered by the contract, the carrier may argue that the notification requirements under the contract were not satisfied prior to the actual assertion of the claim.

In order to avoid exposure of personal assets in situations in which a claim is either denied by a malpractice carrier or exceeds the maximum amount of coverage under the insurance contract, the physician is relegated to other asset protection techniques. As in all cases, such planning must occur well before the assertion of any claim. The implementation of an asset protection strategy after the assertion of a claim will not withstand challenge by a claimant in litigation, nor will a court respect the integrity such a strategy. Therefore, advance planning is necessary.

The most basic asset protection strategy is a gift-giving strategy. That is, to the extent that the physician makes a gift of his or her assets, those assets are removed from the potential claims of a litigant or a creditor. In most cases, however, such a strategy is not practical, since most individuals are adverse to the wholesale gifting of assets to other individuals. Yet, such a strategy should be considered to some degree, since a well-planned gift-giving strategy will operate to reduce federal and state death taxes, while permitting the physician to engage in some element of succession planning.

More common among the various types of asset protection strategies is a technique that requires the establishment of a trust. There are two types of trusts. A revocable trust permits the physician to place assets in a trust while maintaining unfettered control over the disposition and use of the assets. This type of trust has historically been advocated by estate planning professionals as a means by which to reduce the cost of probate upon the death of an individual. Unfortunately, a revocable trust does not provide significant asset protection, since most courts will permit claimants and creditors to breach a revocable trust in order to secure access to its assets.

The second type of trust is referred to as an irrevocable trust. If properly drafted, an irrevocable trust will operate to protect the assets of the physician from the claims of litigants and creditors. In the case of an irrevocable trust, the physician must relinquish unfettered control over the assets. However, the trust can be drafted in such a manner that permits the physician some element of indirect control in certain cases. As most professionals will suggest, great care must be exercised in drafting and maintaining an irrevocable trust. In all cases, the income tax consequences, as well as all death tax consequences, must be considered by the professional who is engaged to design, draft and implement the trust.

To the extent that the physician is not interested in relinquishing control, the physician (if married) should consider converting title to his or her assets to a form of marital tenancy, such as tenancy by the entireties. In most states, creditors and claimants will not be permitted to gain access to assets that are titled in such a manner. As in the case of the irrevocable trust, however, careful planning is recommended. The federal estate tax law provides for a unified credit that operates to reduce the tax liability of the estate of a deceased individual, and most estate planning strategists agree that this credit is most powerful among spouses when certain asset amounts are retained in the individual names of each of the spouses. Therefore, caution must be exercised.

Through the help of corporate counsel, many physicians have determined that the most significant asset protection device exists through state statutes that permit the formation of limited partnerships, limited liability companies and restricted professional companies. The transfer of assets to one of these types of entities provides significant asset protection, since most states prohibit creditors and claimants from gaining access to the assets of these types of entities. The law of each state is different, however, and the physician must be careful to consult the law of the state in which he or she practices medicine, as well as the law of any other state in which the assets (such as real estate) may be located.

Finally, there has recently been significant media attention with respect to so-called "offshore trusts." Such trusts are created under the laws of foreign states and nations, and generally provide a degree of protection against the claims of creditors and claimants in litigation. As a general proposition, such "safe havens" are provided by foreign governments as a means by which to generate business through the management of significant amounts of wealth. In assessing whether an offshore trust is suitable to the needs of a physician, two concerns must be considered. First, the laws of the foreign location, as well as the stability of the government, must be considered. Second, the Internal Revenue Service has increased its scrutiny of offshore trusts in order to ensure compliance with the tax laws and regulations of the United States.

The practice of medicine has become a multi-faceted vocation, requiring the physician to possess a certain degree of business acumen. The risk and hazard of litigation is clear. As such, the physician must be prepared to engage in sophisticated asset protection planning. Each of the foregoing planning opportunities should be considered by the physician, and such planning must occur well in advance of any claims that may be asserted by a potential litigant or creditor. As stated above, a court will not respect an asset protection strategy that is implemented following the assertion of a claim. Therefore, the physician must consider these and other asset protection strategies as a matter of course.