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DOCTORS IN JEOPARDY HOW DOMESTIC ASSET PROTECTION TRUSTS SHIELD AGAINST MEDICAL MALPRACTICE LIABILITY

An Alabama woman accidentally given opiates

during routine rehabilitation developed an allergic

reaction and died six month later; her family was

awarded $20 million in damages by a jury. Survivors

of a man in Mercer, Pennsylvania won a $6 million

judgment for medical malpractice when he died of multiple

organ failure during surgery to remove a small lump from his

chest. Two California siblings received a judgment of $1.75

million when their mother died of a stomach perforation

suffered during hiatal hernia surgery.

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DOCTORS IN JEOPARDY

These are just a few large malpractice judgmentsawarded during the last year or so, in amounts thatcan bankrupt even the most prosperous medicalpractice. Settlements reached outside of court nowaverage more than $425,000, while jury awardstop $1 million. Settlements are increasingnationwide, according to Diederich Healthcare’s2015 Medical Malpractice Payout Analysis. Totalpayouts increased by 1.68% to $3.95 billion in 2015.

At the same time, premiums for malpractice insur-ance are soaring in many states, putting compre-hensive protection beyond the reach of many doc-tors. In areas around New York City, malpracticepremiums for high risk specialties like OB/GYN’sand surgerons top $100,000 per year, while physi-cians in these specialties in certain locations, such as Miami, Florida, can pay nearly twice that.

Vincent D’Addona, CLU®, ChFC® and a senior consultant at Strategies for Wealth, says that he works continually with high net worth doctors and medical professionals who are often unaware of how vulnerable they are to malpractice liability.

“Most high income individuals (assuming they have savings and investments) focus most of their energy on accumulation,” he says. “This seemslogical, yet the reasoning is flawed. You mustprotect your wealth as you go to keep from beingdriven backwards.”

Doctors, D’Addona explains, face particularchallenges. “Physicians are under unbelievablepressure from legislation, reimbursement rates, andother ‘practitioners’ who have not gone tomedical school. They leave medical school severelyin debt, have income that is less than expected,have a largely unknown future, and have to becareful about people who are going to try theirhand at the litigation lottery. Every dollar that aphysician makes is precious. Losing the dollarsthey have accumulated is a more severe setbacktoday because of those pressures,” he says.

How can doctors protect themselves and their fam-ilies from being wiped out by a medical malpracticesuit? Transferring ownership of assets like familyhomes to spouses and other family members canhelp. So can investing in defined contribution planslike 401(k)s, which are off limits to most creditors(but not to spouses in case of divorce). Oneof the most powerful tools for protecting assetsagainst liability is the Domestic Asset ProtectionTrust (DAPT), a linchpin strategy to weathermedical malpractice suits.

UNDERSTANDING DAPTSA DAPT is a self-settled trust, structured sothat the creator of the trust is also the primarybeneficiary of the trust. The trust’s structureprevents the grantor — as well as his or hercreditors — from directly accessing its assets.

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DOCTORS IN JEOPARDY

However, an independent trustee who controls trust distributions may (but is not required to) make distributions to the beneficiary. As a result of this structure, the trustee can refuse to make distribu-tions at any time, including whenever a creditor, or even a former spouse, makes a claim against the trust. In the event of a malpractice liability claim, forinstance, the trustee could protect client assetsby simply refusing to make distributionsfrom the trust.

CHOOSING A JURISDICTIONNot all states permit self-settled trusts, so it is important that the DAPT be established in a juris-diction that supports these trust structures. Sixteen states now permit DAPTs, but a few stand out for particularly good protection.

Steve Oshins, an attorney with Las Vegas,Nevada based Oshins & Associates, LLC, says hecreates roughly ten asset protection trusts a month for clients all over the country. “Since doctors are sued so frequently, it is borderline irresponsible for any doctor not to set up some sort of asset protection vehicle,” he explains. “It takes decades of hard work to get where they are, yet in just one botched surgery they can have their entire net worth wiped out if they don’t take the right precautions.”

Trust laws enabling DAPTs are not available every-where, and Oshins says that not all jurisdictions are equally supportive. “The two top states for DAPTs are Nevada and South Dakota, in that order,” he says. “There are a few other states that are relative-ly close, but I can’t see any justification to go any-where but to one of the top two states. Tennessee and Ohio seem to be the next best states, yet they hardly get mentioned among planners. Alaska and Delaware are the other two states that get a lot of the DAPT business.”

D’Addona favors Nevada for DAPTs because it hasthe shortest statute of limitations period among thestates that allow DAPT’s. This is the time that mustelapse between when assets are transferred to the trust and when those assets should be protected from the creditors of the trust. Nevada has a two year statute of limitation whereas many other states have a four year statute.

A MIXED RECORD IN COURTPhysicians do not have to live in a state thatsupports DAPTs to create one; however the law isun-clear about how much protection thesestructures offer to grantors from non-DAPT states.

For instance, in 2011, an Alaska court voided aDAPT created by real estate developer DonaldG. Huber. Huber began funding the DAPT after hisbusiness had started to founder, eventually

SINCE DOCTORS ARE SUED SO FREQUENTLY, IT IS BORDERLINE IRRESPONSIBLE FOR ANY DOCTOR NOT TO SET UP SOME SORT OF ASSET PROTECTION VEHICLE

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transferring substantially all of his assets, includingtwo homes, several shopping centers, shares incom-panies, his real estate business, and $3million in accounts receivable into the trust. Huber lived in Washington State, a non-DAPT jurisdic-tion, where all of his assets were held. The court ruled that creditors should have access to DAPT assets. However, in Delaware in 2015, the Court of Chancery denied creditors’ claims against threeDAPTs set up by a New Yorker who later moved to Florida.

D’Addona says that DAPTs are, at the very least, a road block to creditors, who may give up on assets in them without even suing. “Michael Jordan has been quoted as saying that you miss one hundred percent of the shots you don’t take,” he says. “If they don’t work … they are certainly a deterrent and a negotiating point.”

HYBRID DAPTS OFFER ADDITIONAL PROTECTIONFor physicians who are concerned about whethera regular DAPT will hold up, Oshins recommends theadditional protections of hybrid DAPT. Theseirrevocable trusts are similar to regular DAPTs, exceptthat they do not initially name the grantor as abeneficiary (typically the grantor names his or herspouse or children as beneficiaries). However, hybridDAPTs nominate a “trust protector” who has thepower to name additional beneficiaries — including,for instance, the trust grantor— at any time..

As a result, if a physician is sued for malpracticedamages, the trust is off limits, because it does notlegally belong to him or her. However, once the timelimit for collecting has passed, the trust protectorcan name the physician as a beneficiary and candirect future distributions to him or her. SaysOshins, “For a resident of a non-DAPT state, this isstate-of-the-art planning.”

DO YOU REALLY NEED A DAPT?Not all physicians require the protection of a DAPT. Some, who live in states where malpractice awards are capped and insurance rates relatively afford-able, may be better off simply buying insurance.

Joel Greenwald, an advisor who specializes in serv-ing physicians through his firm Greenwald Wealth Advisors in St. Louis Park, Minnesota, says that he recently met with an emergency room physician who was concerned about malpractice liability, but that she ultimately decided against a DAPT.

“Most of my clients live in Minnesota and themedical liability situation here is not too bad and alot better than in many other states,” Greenwaldexplains. “Sometimes clients get interested inthese sorts of arrangements because they areworried that their malpractice insurance will not besufficient. However, when they have an initialvisit with a lawyer they hear how complicated andexpensive these sorts of arrangements are theyare not interested in proceeding.”

BEST PRACTICES: FIVE WAYS TO STRENGTHEN DAPTSAdvisors who work with physicians can increase the chances that the DAPT will protect assets by following these guidelines:

1 Start early: Some courts have rejected DAPTs established after creditors were al-ready circling, so it’s critical to protect assets before they’re in jeopardy. Once you’re facing a liability claim it may be too late.

2 Don’t be greedy: Placing all of a client’s assets in a DAPT is another red flag for the courts. Set aside enough to support the cli-ent’s lifestyle, but don’t try to shelter everything they own in a DAPT.

3 Choose the right state: Some states have better protections against creditors than others. Nevada, for instance, allows creditors just two years to collect judgments.

4 Establish an in-state presence: If your client lives in a non-DAPT state, it can help to hold some or all of your assets are held in the state where the DAPT is administered. Consider making a local institution custodian for all or part of the assets in the trust.

5 Consider a hybrid DAPT: A hybrid DAPT, with its flexible capacity for adding beneficia-ries, can provide additional protection against creditors.

DOCTORS IN JEOPARDY

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Indeed costs can be a major consideration. Trust and estates lawyers typically charge $10,000 or more to set up a DAPT, and busy doctors may balk at the amount of time they have to spend on the planning process.

Add to that the fact that many physicians whoestablish DAPTs never have the opportunity to usethem. Both D’Addona and Oshins admitted thatnone of their clients who set up the trusts had beensued for malpractice to date. “The probability of suitis fairly low yet the order of magnitude of the potentialloss is high,” D’Addona explains. “I have been veryfortunate that none of my clients have had to test thetheory, and I hope it stays that way.”

Yet Oshins says that his clients are happy to have the protection, even if they never have to use it “When you compare the costs to buying liability insurance and recognize that there is no liability

insurance that can match the benefits of a DAPT, especially one set up under Nevada law, it should be a no-brainer,” he says.

Oshins also cautions that focusing too much oncosts can be counterproductive. “Some peoplewill shop around until they find the lowest costattorney. You can not please everyone, and manypeople do not see the different between an expertand someone who just fills names into forms anddoesn’t have the experience and understanding ofthe rules to do the same level job,” he says. “Ironi-cally, when many of us pick a physician for a majorsurgery, those of us who can afford it will generallyfind the best physician availability irrespective ofcost because we value a major surgery in suchhigh regard, yet some physicians don’t understandthat the same differences in talent exist amongattorneys too.”

YOUR PARTNER IN ASSET PROTECTIONThe issues surrounding DAPTs and hybrid DAPTs are complicated, and you need a partner to guide you through the details of protecting your clients’assets. Premier Trust, Inc. is a leading trust company staffed with advisors trained in asset protection issues. With 40 team members and more than150 years combined experience in the trust business, we can help you grow and protect your business.

Located in trust-friendly Nevada with offices in Las Vegas and Reno, Premier Trust administers trusts only and does not manage investments. Our clients maintain continuity in their investment plans and retain the relationships they have with their trusted investment and financial professionals. We work closely with financial advisors and other professionals, including attorneys and CPA’s to help them organize, structure and administer their clients’ estate plans. If you’d like to learn more about how to give your client relationships a life after death, contact us at www.premiertrust.com • Tel: (702) 507-0750 • Fax: (702) 507-0755 • Direct Marketing Phone: (702) 577-1777.

HYBRID DAPTS NOMINATE A “TRUST PROTECTOR” WHO HAS THE POWER TO NAME ADDITIONAL BENEFICIARIES — INCLUDING, FOR INSTANCE, THE TRUST CREATOR — AT ANY TIME.