The 8 Biggest Asset Protection Mistakes Doctors Make

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A successful lawsuit without enough insurance could threaten a lifetime of savings

In today’s litigious society, getting sued is not uncommon – especially for doctors.  One in three physicians has a medical liability lawsuit filed against them during their careers, a proportion that goes up as a physician gets older.

Jury verdicts and settlements in malpractice lawsuit cases cost totaled $381 billion in 2017, reports the 2017 Medical Malpractice Trends Review. Even worse, 75 percent of doctors hit with malpractice lawsuits say they never saw them coming.

Of course, any kind of lawsuit can jeopardize a lifetime of savings if your assets aren’t sufficiently protected. And doctors, with a reputation for deep pockets, can be a coveted target for all sorts of claimants. Let’s take a look at the eight biggest mistakes doctors make during asset protection planning:

1. Underestimating the need for umbrella liability insurance. This inexpensive policy should serve as the first layer of protection for doctors. It won’t cover malpractice, but it offers protection if someone is injured by your car or on your property. But take note: too many people mistakenly insure the value of their assets instead of their risk exposure – your assets have nothing to do with the amount of a claim. Most doctors carry between $2 million and $5 million in umbrella coverage at costs that start at about $400 a year.

2. Overestimating malpractice insurance. Though most claims are well-handled by average policies, it can just take one successful huge claim to wipe out an entire practice. Every doctor should invest in comprehensive and current malpractice insurance – and make sure the coverage grows with your practice. But remember that while malpractice insurance is crucial, it doesn’t provide enough asset protection on its own if someone sues you for more than the coverage limit.

3. Not thinking through how assets are titled. Doctors should give careful consideration to how their assets are titled, especially if they’re married. Many states enable assets such as real estate and investment accounts owned by a married couple to be titled as “tenants by the entirety,” one of the highest levels of asset protection. Put simply, it protects jointly owned property of a husband and wife from creditors of either spouse.

This isn’t a bulletproof solution – it doesn’t protect the asset from joint obligations of the husband and wife. It’s also worth noting that if the judgment-less spouse dies first, tenant by the entirety protections disappear and creditors of the surviving spouse could seize the asset. Doctors also need to consider what will happen if the marriage ends in divorce.

4. Believing assets in all living trusts are protected from creditors. Revocable living trusts are created during your lifetime to hold assets that can pass to your heirs without probate upon your death. But while they can be an excellent estate planning tool, they are not safe from creditors. Since they are revocable – meaning the person who creates the trust can move assets in and out – a judge can also order you to use these assets to pay off creditors.

Irrevocable trusts provide asset protection. Once you establish an irrevocable trust, you no longer legally own its assets and can’t control how they are distributed. But beware: a court can undo a transfer to this trust if it finds that the transfer was made with the intention of defrauding creditors. For this reason and many more, it’s critical to begin asset protection planning well before you could become the target of any liability.

5. Assuming all retirement plans are protected equally. 401(k) and defined benefit plans are protected by federal law from creditors. But while IRAs enjoy some limited federal protections during bankruptcy proceedings, their protection is generally governed by state laws that can vary considerably and leave them vulnerable to creditors.

Inherited IRAs are also only protected in some states. If you plan to bequest a large IRA to an heir, make sure the state he or she lives in will give it the same protections as traditional and Roth IRAs.

6. Putting your name on the title of things you can’t control. Every car, boat, or other vehicle owned by your family should only be titled in its driver’s name. That’s because keeping each car titled solely in the name of the primary driver significantly lowers the risk of joint liability if an accident occurs. This rule is especially important when it comes to your children; per mile driven, teen drivers ages 16-19 are nearly three times more likely than older drivers to be involved in a fatal crash. If you have minor children who drive cars owned by you, transfer the title to their name as soon as they turn 18.

You should also be wary of co-owning high liability vehicles like snowmobiles and jet skis with other families – or even lending them out to friends. If something goes wrong, you can be sued if your name is on the title.

7. Failing to protect practice assets. Doctors will go to great lengths to protect their personal assets from potential lawsuits, but often neglect the assets of their practices. Any malpractice or employee claim such as sexual harassment against any doctor in your group threatens all the assets of your practice. Cash flow, the practice’s accounts receivables, and valuable real estate and equipment top the list of assets that need strategies for protection.

8. Perhaps the most overlooked asset protection strategy is not giving away too much of your income to Uncle Sam. A CPA who is experienced with advising physicians can devise a tax strategy – including but not limited to restructuring your employment relationship – that saves a huge amount of money.

Contact Provident CPA & Business Advisors to learn more.

Can Physicians Lose Their House in a Malpractice Lawsuit?

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Find out what’s really at stake

There is a perception that malpractice lawsuits may cost doctors everything – their assets, savings, or even their house. But while malpractice cases can be lengthy and expensive, it’s actually very rare that a doctor would lose it all in these cases if he or she has the proper insurance coverage.

As far as a doctor’s house being lost – under Florida law, for example, homeowners actually have protection from losing their residence if they own the home they live in, aside from creditors that hold a mortgage or lien on the home. Other states offer similar protections, so it’s important to check local laws.

Here are additional details about malpractice statistics and how doctors can better protect themselves by obtaining sufficient malpractice insurance, even if it’s not a state requirement:

Malpractice claims statistics

Getting sued is a reality for a wide range of practicing physicians. Research from the American Medical Association (AMA) showed that 49.2% of physicians over age 55 have been sued at least once.

These legal battles can be expensive. Another AMA report revealed that the average cost of defense for a physician when dealing with a medical liability claim went up to $47,158 in 2010, which was a 62.7% increase since 2001. Average expenses incurred for medical liability claims in 2015 were $54,165, up 64.5% from 2006.

However, AMA also says that 60-65% of these lawsuits are dropped or dismissed. But even when they’re dropped, legal costs alone can still be high for doctors – an average near $30,000.

So how can doctors protect themselves from these costs, especially if they have a near 50/50 chance of being sued?

What’s really at risk if you’re sued

There’s no doubt that a malpractice payout is expensive if the plaintiff wins. The AMA released data that showed the average indemnity payment made to a plaintiff for a medical liability case in 2010 was $331,947.

Medscape also says the average settlement in court is around $425,000. But, that’s only for the 18% of cases that actually make it that far. 90% of cases are settled out of court and 82% don’t go to trial. And, what’s more – most cases are settled without doctors having to spend their own money. The physician’s insurer usually handles the settlement.

There have been cases when doctors have to payout from their own funds. But it’s hard to estimate how often that happens, partially because it’s uncommon. That said, a judgment against a physician that exceeds the amount of insurance they carry – such as $3 million with only $2 million in coverage – does mean that personal assets are at risk. Mere claims against a doctor will also increase the cost of an insurance policy moving forward, and physicians with multiple claims may have difficulty finding an affordable policy – or a policy at all.

The bottom line: The chances of a doctor having to pay from their own funds or assets are slim, as long as the doctor has sufficient malpractice insurance. But there will still be significant expenses associated with a claim.

Malpractice insurance

Some states across the nation don’t require doctors to carry malpractice insurance. But deciding to opt out of this important coverage isn’t a wise choice considering what’s at stake and how much insurers cover doctors in the long run.

The cost of premiums can be pretty high and depend on a number of factors and, as a doctor for the American Academy of Orthopaedic Surgeons points out, these factors include:

  • the probability of errors
  • the cost of defending claims
  • the cost of potential settlements
  • operational costs

The average cost of malpractice insurance varies from $4,000 to $20,000 annually, depending on practice area. Internal medicine doctors see lower rates, while specialty physicians are at the top of the spectrum.

Individual states also have varying mandates for physicians who aren’t required to have insurance. Continuing the Florida example, that state sets conditions for those who choose to “go bare” and not to have insurance. These are:

  • setting up an escrow account
  • obtaining professional liability coverage of at least $100,000 per claim
  • obtaining an unexpired, irrevocable letter of credit of at least $100,000 per claim
  • posting a notice prominently displayed to patients that they don’t carry a type of insurance

Again, make sure you are very well-versed on any requirements in your area before considering this option.

Other potential costs of a malpractice claim

While malpractice insurance is always a good idea for physicians, keep in mind that a malpractice claim is no small matter. Some doctors experience depression, lack of self-confidence, or fear when returning to work after a case, even if they won. They could have also lost a lot of money because they weren’t able to practice during the case when they were in court or dealing with other related matters.

Medscape provided a case study of an OB/GYN who had been sued three times. The doctor decided to settle all three because it was cheaper, but also because the emotional turmoil would have been too much to handle.

There’s no easy way for doctors to protect themselves from the emotional costs of malpractice lawsuits. But doctors shouldn’t make the process even more difficult by failing to have the proper insurance coverage. Because dealing with a malpractice claim takes extreme emotional and financial tolls, it’s always best to consult with a legal professional.

Physicians who are looking to save on taxes and maximize their income should also work with an accounting professional who is well-versed in medical employment issues. An experienced CPA may be able to find tax benefits and ways to structure employment relationships that accomplish these goals – such as realizing immense tax benefits from working as a contractor rather than a full employee of a medical facility or physician’s group. To learn more about lowering your tax burden and maximizing your wealth, contact the experienced team at Provident CPA & Business Advisors today.

Employee vs. Contractor: Why Not Knowing the Difference Can Land Your Business in Hot Water

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Make sure you fully understand the ramifications of mislabeling a worker when doing your taxes

Your business may see big benefits in hiring independent contractors for certain work. But it’s crucial to remember the difference between an employee and an independent contractor when reporting your taxes each year. Making a mistake in differentiating between the two can cost you penalties.

Some businesses mislabel regular employees as contractors on purpose to save on tax expenses, according to the National Conference of State Legislatures. But doing so has both legal and financial ramifications that just aren’t worth it.

Here’s how to tell the difference between a contractor and a regular employee: 

Independent contractors vs. employees: The basics

The IRS says that a person is an individual or independent contractor if whomever they work for has the right to “control or direct only the result of the work and not the means and methods of accomplishing the result.”

Basically, if you contract with an individual and generally outline the scope of work, yet you leave them freedom over how that final desired result is reached, their position is more of an independent contractor role. If a worker is an independent contractor, you as the employer usually don’t have to withhold federal taxes or pay taxes on payments to them.

A regular employee is generally someone who works for you who is performing services that you have the right to control. This means that their role is an integral part of the way the business operates, and there are guidelines that you provide them to govern how they get the job done.

Employers need to withhold income tax and pay Social Security and Medicare taxes on any payments to regular employees. Unemployment tax is also paid on anything paid to an employee.

How to make a determination

To figure out an employee’s level of independence or control, there are three categories to help you decide, as outlined by the IRS:

1. Behavioral control

Behavioral considerations include the following:

  • Do you have the right to direct how tasks are done?
  • Are instructions given to the worker when they’re hired? These instructions could relate to when work happens, where it will be done, what they’ll use to do the work, how to order tasks, etc.

The main consideration here is whether the worker’s tasks are fully determined by you, the employer. If everything is outlined and controlled, it’s likely that the worker is a regular employee.

2. Financial control

There are also financial considerations that need to be examined before you decide how to classify a worker. Questions to ask yourself include:

  • Does your business have the right to control financial and business aspects of a worker’s role? For instance, are expenses paid for by the company? The IRS says that an independent contractor is more likely to have unreimbursed expenses.
  • What kind of investment is a worker making to work for you? Independent contractors are more likely to have their own investments in either the space or the equipment with which they perform services.
  • Is the worker free to seek out other jobs? If so, they are likely independent and are often seeking new projects from different clients.
  • How is the worker paid? Regular employees are promised steady payments at an agreed-upon amount. On the other hand, an independent contractor is commonly paid a flat fee for a one-time service, though some are paid hourly.

3. Relationship of the parties

There are several factors to consider when determining whether a work relationship constitutes a regular employee-employer relationship. These factors include:

  • Whether or not benefits are provided, such as health insurance or vacation days.
  • Whether the work relationship is permanent or temporary. If you lead a worker to believe that the engagement will be for a longer or indefinite time period, this could be proof that the job was intended to be a regular employee relationship.
  • Whether a worker’s duties are crucial to the regular business and operations of the company. This means you’ll probably be controlling the details of the worker’s tasks.

What happens if you misclassify?

Some employers will purposefully misclassify a regular employee as an independent contractor to save on expenses. These expenses could be Social Security and Medicare taxes, mandatory overtime pay, benefits, workers’ compensation, and unemployment compensation tax.

But this is a big mistake that can cost you much more than those expenses.

If a mistake is discovered, whether an employee filed a complaint or it was found in a company audit, the Department of Labor (DOL) and the IRS will first determine whether the mistake was intentional or unintentional, and it could end up being a charge of fraud.

If a mistake was unintentional, the minimum penalties are to deal with the necessary reclassifying of payments as wages, including:

  • $50 for each wrong W-2 that was filed.
  • Income tax would not have been withheld, so penalties would be 1.5% of wages on top of 40% of Social Security and Medicare taxes, plus all of the FICA taxes that should have been paid on that income.
  • Another penalty of 0.5% of unpaid tax liability for each month, up to 25% of total tax liability. This is called a Failure to Pay Taxes penalty.

And these are just the fees that apply if a mistake was found to be unintentional. If the IRS finds intentional mistakes or suspects fraud, additional fines will be applied that can be quite high. Criminal penalties of $1,000 per misclassified employee could be imposed. Liability accusations may also arise.

It’s never worth making this mistake, even if unintentional. That’s why it’s crucial to understand these distinguishing elements.

It’s always a good idea to talk to a professional who can ensure you report everything correctly. Get in touch with Provident CPA & Business Advisors today to learn more about the services we can offer you.

How to Minimize Taxes When You Sell Your Medical Practice

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Understanding these key issues keeps more money in your pocket than Uncle Sam’s

Small, independent medical practices once dominated the medical landscape. But doctors are increasingly giving up their independence to join larger groups or hospital systems that eliminate the headaches of running a business in today’s health care climate.

2016 marked the first time ever that less than half of practicing physicians in the U.S. held ownership stakes in their practice.

But whether you’re ready to retire or accepting a buy offer, selling your medical practice can lead to a hefty tax bill if you’re not careful. And in the highly regulated health care industry, it’s easy to get so caught up in business and contractual terms that you overlook the tax implications of a practice sale that may affect you far into retirement.

Let’s take a look at some of the key tax issues you need to consider before you sell your medical practice.

How will you structure your sale?

Medical practices are typically sold through two types of transactions: asset sales or stock sales. Different tax advantages and disadvantages surround each option, and which one you choose also depends upon the corporate practice of medicine (CPM) and fee-splitting laws in your state. If your state permits non-physicians to own a physician practice, you have much more flexibility to choose how you want to structure your sale no matter who your buyer may be.

  • Stock sale. A stock sale is what most people envision when they talk about selling a medical practice: the buyer buys the practice with the intention of taking over the role of the doctor who’s selling. The buyer purchases the previous owner’s equity in the practice, as well as its assets and liabilities. Most or all of the accounts on the practice’s balance sheet are also included.

Stock sales can only be conducted entity-to-entity but can be done by any type of corporation, from C-corporations to S-corporations to LLCs.

Sellers favor stock sales because they enable them to completely cut ties with the practice and avoid any future liabilities that stem from it. They also enjoy the tax benefits: most stock sales are taxed at the long-term capital gains rate, which is capped at 20 percent. That’s because the practice’s stock is trading hands, and the gain is like a long-term stock gain for the sellers.

The increased risk of assuming the seller’s liabilities causes many buyers to shy away from stock sales. But others prefer them because they make it easier to assume third-party payor contracts and Medicare numbers.

  • Asset sale. In an asset sale, the buyer purchases certain assets and liabilities of the medical practice – but not others – and the selling entity remains intact. Put simply, buyers can cherry-pick which assets they want – like a particular piece of equipment – and which liabilities they don’t, like pending litigation. Usually the majority of the seller’s assets are included in the deal, including patient lists and equipment.

Asset sales can be done by individuals or corporate entities.

Here’s the tax drawbacks for the seller: Many of the assets you sell will be taxed at ordinary income rates, which can climb as high as 37 percent, depending upon your individual situation. So, say you bought a desk for your office for $2,000, depreciated it over the past five years on your tax returns, and then valued it at $500 on your list of assets during the sale. The difference between the fully depreciated asset ($0) and the sale price ($500) is taxable at ordinary income rates. Multiply that out over all of your fixed assets, and you can see how it starts to get pricey.

Incidentally, special attention should also be paid to the portion of the purchase price that’s allocated to your practice’s non-compete agreements, which many people don’t realize will also be taxed at an ordinary income rate.

Now read this carefully: In most practice sales, the majority of the value of the practice comes from intangible assets like goodwill, which is taxed at long-term capital gains rates. Sellingapractice.com defines goodwill as “the value of a company’s brand name, solid customer base, good customer relations, good employee relations, and any patents or proprietary technology.”

During negotiations, sellers will want to lower the value of their tangible assets and amplify the goodwill, and buyers will want to do the opposite. That said, the IRS and health care regulatory requirements insist that the value a practice sets for its tangible assets is based upon fair market value at the time.

Why your corporate structure matters

The way your practice was incorporated also has important tax implications during a sale. C-corporations are subject to double taxation: income is taxed once as earnings, and then shareholders are taxed again when the earnings are distributed. S-corporations are only taxed once to the shareholders.

If the selling practice is a C-corporation, the double taxation can cause asset sales to result in a nasty tax burden. In those cases, selling the business in its entirety through a stock sale is usually a better choice because it only results in one tax bill.

Sole proprietorships can only be sold through asset sales.

So, what does all of this really mean?

The purchase price of asset sales is broken down into different classes of assets: goodwill, non-compete agreements, tangible assets, intangibles like intellectual property – all of which are taxed differently by the IRS. The way the price is allocated among these asset classes has significant tax implications and should be a major negotiating point for both parties.

For tax purposes, asset sales generally benefit buyers. By maximizing the purchase price of assets that depreciate quickly (equipment) and minimizing the value of assets that depreciate slowly or not at all (goodwill), a buyer can reap tax benefits from the purchase price because they can write off the depreciable assets they acquire over future years. Goodwill must be amortized over 15 years.

Thanks to the new Tax Cuts and Jobs Act, Section 179 of the IRS tax code also allows businesses to write off the entire purchase price of qualifying equipment of up to $1 million in the year they buy it – with a total spending cap on equipment purchases of $2.5 million. For taxable years beginning after 2018, those caps will be adjusted for inflation.

Doctors who sell, on the other hand, receive a taxable gain or loss that’s based upon the difference between the sale price of their practice and the tax basis of its assets and liabilities. By the time the assets are sold, much of the practice’s equipment was most likely fully depreciated for tax purposes – so any amount that exceeds its book value will be taxed at an ordinary income rate.

The bottom line

Hospital systems are aggressively snapping up physician practices nationwide, and you shouldn’t wait until you receive a buy offer to start researching the kind of deal you want. Selling a medical practice can be extremely complex – and it’s easy for even the most financially-savvy doctors and their attorneys to make mistakes that carry long-term tax implications. Remember, if one component of the deal is good for you, it’s probably not good for the other side. An experienced certified public accountant can help you structure a deal that keeps the most money in your pocket, not Uncle Sam’s.

Provident CPA & Business Advisors serves successful professionals, entrepreneurs, and investors who want to get more out of their business and work less, so they can make a positive impact in their lives and communities. Typically, our clients reduce their taxes by 20 percent or more and create tax-free wealth for life. Contact us for expert advice on tax planning, and to find out how we can help your business exceed your expectations.