First, Do No Harm

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Protecting Assets

One common financial disaster that can result in a significant loss of assets is a civil lawsuit. Lessons #5 and #6 will offer almost two dozen specific solutions to help mitigate litigation risks. Though malpractice lawsuits are a significant risk for physicians in today’s society, they do not pose the most significant risk to one’s wealth if proper insurance is in place.
This Lesson will explore those additional—and more devastating—financial disasters that must be addressed if you wish to achieve and maintain wealth. These risks include both health-related and financial events. More specifically, this section of the book will teach you how to:
· Protect your family from an unexpected death
· Keep paying your bills even if you can’t work due to disability
· Handle long-term care expenses before they arise
· Make sure you don’t run out of money in retirement
· Avoid healthcare and insurance threats
· Avoid employment threats
· Obtain insurance to protect against business and personal risks

post 7Protecting Your Family From an Unexpected Death
The emotional distress caused by the premature death of a loved one cannot be exaggerated. Long before the psychological scars begin to heal, financial devastation for surviving family members may begin. If proper planning is not undertaken, the value of the medical practice, which could be a saleable asset to help the family, may be lost.
There are various obstacles to successful financial planning in the case of unforeseen death simply because none of us knows when our time will come. The 2003 National Safety Council’s study on deaths ( and the 1999 US Census Bureau’s Statistical Abstract of the United States, which surveyed the year 1997, reported the following statistics in regard to unforeseen death types:
· There is a 1 in 24 chance (4.17%) that you will ultimately die from a stroke
· There is a 4% chance you will die from an accident or the adverse effects of one
When you add these two risks together, you can see that approximately 1 in 12 people will die from an unforeseen risk. In addition, a number of people will find out they are terminally ill and their families will not be able to purchase personal life insurance to help them manage the financial burden created when they pass away.
Another obstacle to successful financial planning in the case of unforeseen death is that most people don’t enjoy contemplating, let alone discussing, the death of a family member. As a result, few families are financially or emotionally prepared for this traumatic event.
In this chapter, we will discuss two financial losses that can occur at the time of death:
· Loss of income
· Loss of an estate (via estate taxes and probate costs)
Physicians and their families can use particular insurance planning strategies to efficiently manage the risks which often result from the premature death of a family member. In addition, proper legal documentation must be created to allow for efficient handling of financial matters at death—including offering the executor of the estate the legal power to effectuate a transfer prior to the estate going through probate. If there are unnecessary delays in this process, the patients will seek another practitioner, thus diminishing the value of the practice further. This chapter aims to teach you how to protect wealth from the death of a patriarch or matriarch. Let’s explore how this can be done.

Income Protection
A key to successful planning is an ability to put one’s fear of death aside and focus on the financial impact a death may have on a family. The first financial impact of death, especially for younger families, is the lost income. Once a father or mother has passed away, they obviously will not earn any more income. If the family hasn’t met all of its saving goals (most don’t until they are well into their fifties), there will be a significant financial strain from the death. The key to maintaining wealth is making sure that no financial catastrophe wipes out the family. To show you how significant this loss of income can be, consider the following.
The present value of twenty years of lost income for the Average American family (with $45,000 of annual income) is approximately $636,000. That means that, at the time of death, the family would be in the same financial situation if they had 20 years of income OR had a lump sum of $636,000.
For the family of a physician who earns $300,000 per year, the present value of twenty years of lost income is over $4,200,000. For the family of a very successful specialist who earns $1,000,000 per year, the present value of 20 years of lost income is $14 million. The simple estimate implies that a family needs approximately 14 times the annual income of the breadwinner to replace twenty years of lost income. If you have a younger breadwinner or a breadwinner who just intends to work 30 more years, the multiple used to approximate the present value of future income is 18 times one year’s income.
What these examples illustrate is that a family needs life insurance in the amount of at least 14 times the annual income of each wage earner just to keep them on track to meet their financial goals (assuming that their current earnings were keeping them on track before the death). Also, this estimate assumes no adjustment for inflation. Over twenty to twenty five years, the value of a dollar is reduced by 50%. For that reason, you could estimate that a family needs between 14 and 28 times one year’s after-tax salary to replace twenty years of income. Do you have enough life insurance to protect your family and leave them in a position to meet their goals if you were to die?
In addition to lost income, the practice asset will be lost if proper estate planning doesn’t establish a trustee with a power of sale. This is the best possible option since More

Use Retirement Plans

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There are socially beneficial reasons for the creation of tax incentives surrounding qualified retirement plans. If you see a long history of tax benefits being afforded to a particular behavior or asset, this is generally because Congress believes that the behavior or asset provides some economic benefit to society as a whole. We will revisit additional tax benefits for investments later in this Lesson and in Lesson #8. In the case of retirement vehicles, the theory is that by encouraging people to fund their own retirement, the government (and the rest of us taxpayers) will not have to support them in retirement.
Two retirement tactics for Doctors to consider are:
1. Maximizing available qualified retirement plan contributions for all members of the family.
2. Maximizing investments in vehicles that are similar to qualified retirement plans for all members of the family.
As you learned in Lesson #1, Doctors must Leverage assets, capital and advisors if they want to work less and build more. By creating separate business entities to own real estate, equipment and liquid assets, Doctors are able to create employment opportunities for members of their family. By creating income opportunities for family members, you can accomplish two things:
1. Generate effective wealth transfers to junior generations.
2. Create opportunities for such family members to make tax-deductible contributions to their own retirement plans.

MA photo by Mikael Kristenson. The Use of Qualified Plans
Since tax deductible retirement plan contributions are limited for each person, having additional family members earning income within a family business or practice allows multiple tax-deductible contributions. This technique reduces the total tax liability for the family. In an earlier Lesson, you learned that qualified retirement plans were afforded the highest level of protection from creditors (+5). The use of multiple contributions also affords physician families greater level of asset protection for their total wealth, as more money will be invested into this exempt asset class. In addition to the reduced taxes and increased family savings, this strategy helps protect those savings from lawsuits (see Lessons #5 and #6). All of these benefits are integral for long term, sustainable affluence. There are many types of tax-deductible retirement vehicles. They fall into one of two cat-egories: defined contribution plans or defined benefit plans. Defined contribution plans restrict the amount you can contribute to the plans on an annual basis. These include all forms of IRAs (individual retirement accounts), profit sharing plans, money purchase plans, 401(k) plans, and others. Defined benefit plans restrict how much can be in the plan at any time. The broader category of defined benefit plans includes fully insured defined benefit plans which are also known as 412(i) plans. Typically, defined benefit plans are used to help older individuals catch up on lost contributions.
The choice and implementation of the right plan for the situation will be determined by your planning team. The benefits of that planning will vary widely depending on each family’s circumstances and the ages and salaries of the employees.

Maximize The Use Of Vehicles Similar To Qualified Plans
Another tactic Doctors should employ is to use tools and techniques that mirror many of the benefits of retirement plans. Since retirement plan contributions are limited, Doctors need to utilize alternative saving and investment methods to meet their significantly higher long-term retirement needs. A common strategy to enhance long-term retirement income and reduce taxes on investment gains is to invest in cash value life insurance. This will be discussed in detail in Lesson #8 where we discuss how certain investments offer important benefits to Doctors. If you want to maximize long term, tax-efficient retirement income, you should definitely take time to review Lesson #8.

The Diagnosis
Retirement plans are a great way to achieve a high level of asset protection, while reducing cur-rent tax liabilities. In addition, the use of vehicles like cash value life insurance policies can help Doctors avoid taxes on investment gains and enhance retirement income while protecting assets from lawsuits all at the same time. Other vehicles, like Family Limited Partnerships and Limited Liability Companies, can also offer tax benefits. These are discussed in the next chapter. More