Are your Personal Assets exposed to Litigation?
Posted on May 26 2015
Sadly the trend over the last few decades in this nation has been the dramatic rise in litigation. It is no longer unrealistic to have a potential claim against you from a disgruntled patient, who through unfortunate circumstances in their lives have decided to take it out on you, or perhaps you made an innocent but costly mistake. Naturally you want to protect your family and your assets from unscrupulous litigants. Being sued is far more than just a financial pressure, legal action brings an emotional cost.
How likely are you to be sued?
The Australian Institute of Health & Welfare reported that in 2010-2011 there were 2800 new medical indemnity claims for that year, split almost evenly between public and private sectors.
In the United States a survey conducted by the American Medical Association found that 42% of American Physicians had been sued at some time in their lifetime and 20% had been sued at least twice.
How can you protect yourself?
Aside from Professional Indemnity Insurance, I want to suggest three main ways you can protect your assets:
Option 1: Assets in your Spouse’s Name
This is a traditional one used by business people to provide their family with protection if they get sued in their capacity as company directors. This can be quite effective and can be regarded as an ‘oldie but a goodie’.
It makes good sense to have houses and cars in your spouse’s name, particularly if they are not working or are in a career that is less exposed to litigation.
Option 2: Superannuation
Many people are surprised to find that their superannuation fund is asset protected from creditors, after all it is your money isn’t it? Well – sort of. The good news is that whilst you control your retirement funds, a superannuation fund is a form of trust structure. You are simply a beneficiary of that trust. This principle holds true whether you are in a large retail superannuation fund or whether you use a Self Managed Superannuation Fund.
One of the great advantages of superannuation beyond the asset protection is its tax effectiveness. As an entity a superannuation has two phases in its existence, the accumulation phase and the pension phase. In the accumulation phase the maximum tax rate is 15% and in the pension phase this drops to 0%. For Doctors this has some great advantages.
As an example, let’s assume you buy your medical premises in your superannuation fund for $500,000. At retirement the premises have appreciated in value and are now worth $900,000. If you were to sell the premises in retirement (i.e. when you are in the pension phase), you would not incur capital gains tax on the $400,000 gain you have made simply because your super fund would now be in the tax free phase.
Option 3 – Family Trust
A trust is a structure that legally owns an assets on behalf of another person or group of persons (such as a family). The person (or corporate entity) that legally owns the assets is known as the ‘trustee’ and their role is to manage the assets in a prudent manner on behalf of the ‘beneficiaries’ for whom the assets are supposed to ultimately benefit.
There are a number of different types of trust, but in the context of asset protection for a Doctor, I want to focus on what we call a ‘discretionary’ family trust. The discretionary aspect is a key attraction of a trust beyond its natural asset protection benefits. The discretion is the ability for the trustee to decide which beneficiary(s) can receive capital or income from the trust each year, or if it is wound up. It is the discretionary aspect that makes a family trust so useful to manage tax liabilities as the trustee has the power to allocate capital and income in a tax effective manner, by allocating it to the most suitable beneficiaries (i.e. those with low incomes) or to spread the liability amongst multiple beneficiaries.
From an asset protection perspective it is improbable that creditors can access assets within the trust even in the event of your bankruptcy for the simple reason, that the money inside the trust is not legally yours. For example, a Doctor acquires his medical premises in his family trust for $600,000 and rents it from the trust to run his practice. The Doctor gets a negligence claim from a patient who was unhappy with some recent surgery. The patient wins the case, but as the premises are held inside the trust, they are unable to access it.
In reality a combination of all three is likely to help you achieve your asset protection objectives.