asset protection

[Jeff05]

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what are the attendings doing for asset protection?
do you use a CPA, lawyer, MBA?
offshore stuff?
LLC?

 

[deleted126335]

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[thegasman]

what assets?, everything I got is owned by the bank - and my cash flow all goes to pay off the bills. Heck - I probably have less spare change now than I did as a resident.

 

[Planktonmd]

what assets?, everything I got is owned by the bank - and my cash flow all goes to pay off the bills. Heck - I probably have less spare change now than I did as a resident.

Yes, the way the economy is looking, very soon we won't have to worry about assets or asset protection.
Malpractice lawyers must feel very nervous now.

 

[mille125]

Lots of insurance.

If you are a very high income individual (which likely includes most attendings on this forum), cash value insurance is a very very good asset protection device for many reasons. It grows tax free which helps to offset the higher commission that you will have to pay. It also provides a very good shield from creditors.


Do not believe the hype that you hear from many financial programs. Suze Orman preaches buy term life insurance and invest the difference. This is good advice for the vast majority of americans but not for high net worth individuals. You will find that most advisors are not aware of how to protect high net worth individuals. It is imperative to hire a good advisor.


FLP's, LLC's, trusts, and other specialty vehicles also make sense in some situations.


Finally, you need to find what assets are protected in your state of residence. In my state cash value life insurance, 529's, your homestead (if residing there for more than 40 months), and retirement plans are all protected. My friends in North Carolina are not as lucky (call it the John Edwards effect). Obviously, you want to max out contributions into these entities before going to more expensive models. Good luck.

 

[militarymd]

If you are a very high income individual (which likely includes most attendings on this forum), cash value insurance is a very very good asset protection device for many reasons. It grows tax free which helps to offset the higher commission that you will have to pay. It also provides a very good shield from creditors.


Do not believe the hype that you hear from many financial programs. Suze Orman preaches buy term life insurance and invest the difference. This is good advice for the vast majority of americans but not for high net worth individuals. You will find that most advisors are not aware of how to protect high net worth individuals. It is imperative to hire a good advisor.


FLP's, LLC's, trusts, and other specialty vehicles also make sense in some situations.


Finally, you need to find what assets are protected in your state of residence. In my state cash value life insurance, 529's, your homestead (if residing there for more than 40 months), and retirement plans are all protected. My friends in North Carolina are not as lucky (call it the John Edwards effect). Obviously, you want to max out contributions into these entities before going to more expensive models. Good luck.

How are you defining that term?

1 million of assets not including your home?

5 million

10 million...

 

[mille125]

How are you defining that term?

1 million of assets not including your home?

5 million

10 million...

I am sure that you qualify military....
I define it one of two ways...


1) Income in the top 0.1 percent which equates to over 350K

and/or

2) Net worth of greater than 3 million dollars

 

[militarymd]

I am sure that you qualify military....
I define it one of two ways...


1) Income in the top 0.1 percent which equates to over 350K

and/or

2) Net worth of greater than 3 million dollars

I would rather be in group number 2 than in group number 1....

 

[cchoukal]

mille125, since you mentioned the importance of a good advisor, I thought i'd ask. I met with a group advisors whose business was exclusively physicians. they seemed very sharp and very reasonable, but their cut on mutual fund growth is 5%. this seems REALLY high. is it worth this rate to, as you say, have a good advisor who can service the unique needs of a physician and/or a high income earner?

 

[urge]

what assets?, everything I got is owned by the bank - and my cash flow all goes to pay off the bills.

I'm in the same boat. I have no assets to protect.

 

[zippy2u]

SSHH, connect the dots... dual citizenship, caribbean, blue water sailboat and >$10,000. Regards, ---Zippy

 

[mille125]

mille125, since you mentioned the importance of a good advisor, I thought i'd ask. I met with a group advisors whose business was exclusively physicians. they seemed very sharp and very reasonable, but their cut on mutual fund growth is 5%. this seems REALLY high. is it worth this rate to, as you say, have a good advisor who can service the unique needs of a physician and/or a high income earner?

That seems rather high. I would hope that they are saving you on taxes or in some other way.

 

[cfdavid]

mille125, since you mentioned the importance of a good advisor, I thought i'd ask. I met with a group advisors whose business was exclusively physicians. they seemed very sharp and very reasonable, but their cut on mutual fund growth is 5%. this seems REALLY high. is it worth this rate to, as you say, have a good advisor who can service the unique needs of a physician and/or a high income earner?

Hell no, that's not worth it. Not unless they're returning 15% or much better, which is highly unlikely.

 

[deleted126335]

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[Lonestar]

SSHH, connect the dots... dual citizenship, caribbean, blue water sailboat and >$10,000. Regards, ---Zippy

I like where you are heading. Just give me a pm when you are ready to leave and I will start packing my bags. 😀

 

[radslooking]

If you are a very high income individual (which likely includes most attendings on this forum), cash value insurance is a very very good asset protection device for many reasons. It grows tax free which helps to offset the higher commission that you will have to pay. It also provides a very good shield from creditors.


Do not believe the hype that you hear from many financial programs. Suze Orman preaches buy term life insurance and invest the difference. This is good advice for the vast majority of americans but not for high net worth individuals. You will find that most advisors are not aware of how to protect high net worth individuals. It is imperative to hire a good advisor.


FLP's, LLC's, trusts, and other specialty vehicles also make sense in some situations.


Finally, you need to find what assets are protected in your state of residence. In my state cash value life insurance, 529's, your homestead (if residing there for more than 40 months), and retirement plans are all protected. My friends in North Carolina are not as lucky (call it the John Edwards effect). Obviously, you want to max out contributions into these entities before going to more expensive models. Good luck.

Cash value life insurance has drawbacks too. If you don't contribute maximally yearly, or miss payments, you forfeit the cash invested. If you hit hard times and need the cash for other purposes, not good. Also, those tax-free withdrawals wont be happening until many years down the road, and those are dependent on you making a profit on the investments over those years.

dont forget that the majority of the first year's premium goes to you financial advisor. And that they get a percentage of your yearly contribution after that.

Id seriously consider investing your money other ways, and sheltering it in different ways, other than insurance.

 

[deleted126335]

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[mille125]

Cash value life insurance has drawbacks too. If you don't contribute maximally yearly, or miss payments, you forfeit the cash invested. If you hit hard times and need the cash for other purposes, not good. Also, those tax-free withdrawals wont be happening until many years down the road, and those are dependent on you making a profit on the investments over those years.

dont forget that the majority of the first year's premium goes to you financial advisor. And that they get a percentage of your yearly contribution after that.

Id seriously consider investing your money other ways, and sheltering it in different ways, other than insurance.

This is why it is not a good investment for the average american. All of the things that you said are true. However, you need to realize that you are not an average american when it comes to income. Almost every attending on this site will be a high net worth individual. All of those facts that you quote do not apply to high net worth individuals. How many of us are going to miss payments or not contribute maximally? The answer is very few.

You need to remember that you are in the highest tax brackets. You are getting taxed up to 50% (if factoring in state taxes in some states). This is not true of most of America. Your earnings will grow tax free in this vehicle. This alone will offset almost any fee that the broker will charge you. You need to also remember that you have many assets to protect. The average Joe six pack does not. You will be in a much better place in terms of asset protection.

Suze Orman does not do service to you. You need to think outside of the box. Most of the tax/wealth advice that you hear does not serve you well. Cash value life insurance is a very good vehicle for the ultra wealthy and for high net worth individuals. Go see a professional today.

 

[deleted126335]

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[mille125]

Still disagree. Buy term insurance. Payoff debt, max 401K, put lots of cash in 529 plan, Buy tax efficient investments like tax managed mutual funds, ETFs, municipal bonds. Cash value life insurance is sold not bought. I have read extensively on this subject and am totally comfortable with my strategy.

I am glad that you are comfortable but lets make sure that you have considered all of the facts.


1) Your whole life investments grow tax free while your mutual fund strategy will incur a 35% income tax, a possible state income tax, and possible probate and estate taxes. Wow, that is a lot of tax (maybe as high as 50% in some cases).

2) You do pay higher insurance fees/commissions for whole life but investment is not free. You will pay commissions as you "invest the difference". As we all know the market approach is can be feast or famine. If you get a whole life policy from a top rated company your after tax return will be near 5%. Can you say that in "the market" over the past 10 years. Calculate your return on your investments over the last 10 years. Then subtract your tax rate and investment fees. Did you make an average of better than 5%? If so, then congratulations because you are doing better than 99% of all of the investors in this time period.

3) You have asset protection in the whole life situation. Your cash value policy cannot be seized. How about your money sitting in your mutual funds? How is it protected and how much are you paying your attorneys to draw up those trusts and FLP's. Physicians need asset protection.

4) With whole life you have a life insurance policy forever. With term you will lose the life insurance portion. Your health will likely change at the end of the term and your will find it very difficult to qualify for an more insurance.


5) With cash value policies your heirs will receive their payments in a much more timely manner without lawyers.


In summary when using "buy term and invest the difference" you must add taxes and mutual fund fees. This is almost always higher than the "fees" that you would pay a broker under a cash value formula (remember there is no tax here). For those that live in an income tax state the numbers are even uglier.

Are you still comfortable with your strategy? I think that it is pretty clear to all that if you are Joe six pack then you should buy term, ignore me, and listen to Suze Orman. However, if you are a high net worth individual then you should ignore Dr. Doze.

 

[deleted126335]

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[urge]

I'm not that concerned with retirement. There are 3 scenarios on my mind. 1 you live until old age and thus need a good retirement plan. 2 you die before you retire. 3 the money you put away is worthless. I think the most likely to happen is one of the last 2. Pay all your debt including your house is the best advice anyone can get. Get disability and term life insurance. Whatever money is left you can invest with the caveat that you might never see it again.

 

[mille125]

"


I am a high net worth individual and am completely comfortable with my strategy. I recommend a young doc fresh out of training buy a 25 year level term policy for 2.5-3 million use the extra cash to pay down debt, invest in tax efficient vehicles.
You sound like an insurance salesman or someone who has one in the family or someone who drank the Koolaid (got taken and is in denial)

I am not a salesman nor do I have any family members or friends that are in the insurance business. I am a hard working physician just like yourself. You tell me that my approach is wrong but you have not given me one reason as to why yours is so much better (other than the fact that you are comfortable with it). I gave you a bunch of reasons as to why my approach is better for high earners who care about protecting their assets.


I am not saying that my approach fits the needs of everyone. In fact it is a bad strategy in 95-99% of the general population. It seems to fit well with those who make 350K or more per year, have 3 million dollars or more of assets, or live in a high income tax state.


I do agree that all physicians should pay down debt and max out their 401K's. We differ on what to do after that. Please educate me and the rest of the forum since you seem to have all of the knowledge. My specific questions for you include:

1) How do you handle insurance needs once your term ends?
2) How do you protect your assets that are in these "tax efficient vehicles"?
3) What has been your after tax return on your investments over the last 10 years?

 

[deleted126335]

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[mille125]

1. I plan to be self insured (as far as life insurance goes) sometime in my mid 50s.

2. $8 million medical liability policy. $5 million umbrella liability policy. Well funded 529 plans.

3. My investment portfolio is a 60/40 mix of stock/bonds. Heavy tilt to small, value, international. Taxable accounts are DFA and Vanguard tax managed funds and a few ETFs. Like everyone else I have taken my lumps. Been rebalancing and tax loss harvesting all the way down.

Still waiting for YOU to respond to the following:

1. "Cash value policies only work over the VERY long term (more like 20 years) I just don't think that you are adequately compensated for tying up your money that long (liquidity premium) Why don't you tell us how long the average person who takes out a whole life policy ACTUALLY winds up keeping the policy in force and actually earns on their returns? Why don't you tell us what actual cash surrendur values are after 1 year, 3 years or 5 years, in case you change your mind?"

2. How about policies being written NOW in the current interest rate environment? I am willing to bet that the guaranteed minimum return is a a lot lower. How have the Variable Life or Variable Universal life policies done over "the last 10 years?" What are the guaranteed minimum returns like on those?





Responses:

My question #1.........It is obvious that you plan to self insure because you will not be able to get more term insurance without paying the price. I dont know your situation but it would appear to me that you might be in your peak earning years in your mid 50's. If you die at that time would your family need insurance. Only you would know the answer to this. Some people in that situation might need insurance.

My question #2.......All I can say is wow. 8 million of malpractice and 5 million of umbrella. You must be in a high risk state. How much is this costing you? I would think that it would be very expensive (on the order of tens of thousands of dollars)? This is one approach to protect your assets but there are others. In my state no one has more than 1 million malpractice and few have more than 2 million umbrella. In fact you cannot get anyone to write a policy with your limits. 529's are good ways to pay for educational expenses.

My question #3......Again what is it costing you to make your investments. What is your fund charging you? It is likely not as much as you would pay for cash value life insurance but it is not zero. All I am saying is that when you add the administrative fees of your funds to the amount of tax that you pay it is likely more than the administrative fee you would pay for the insurance (and thus a lower return). In addition I would have insurance and your would not.


Your question #1.....Some people who have cash value are under insured. If you would like, I could give you two similar scenarios for both "buy term and invest the difference" vs buy cash value. Again it is based on assumptions but I think that you would be surprised at how well the cash value pathway does comparatively speaking.


Your question #2....If you pick a good company, the guarantee minimum return approaches 5% with no tax.



Every situation is different. I do not know all of the details of your situation. Perhaps the buy term and invest the difference approach works best for you. However, many will find that the cash value approach is superior for them especially if you are in the highest tax bracket. Dont take my word for it. I encourage all to find a fee based financial advisor who does not sell insurance products. Get an opinion from such a person. You should do so as well, Dr. Doze.

 

[mille125]

1. I plan to be self insured (as far as life insurance goes) sometime in my mid 50s.

2. $8 million medical liability policy. $5 million umbrella liability policy. Well funded 529 plans.

3. My investment portfolio is a 60/40 mix of stock/bonds. Heavy tilt to small, value, international. Taxable accounts are DFA and Vanguard tax managed funds and a few ETFs. Like everyone else I have taken my lumps. Been rebalancing and tax loss harvesting all the way down.

Still waiting for YOU to respond to the following:

1. "Cash value policies only work over the VERY long term (more like 20 years) I just don't think that you are adequately compensated for tying up your money that long (liquidity premium) Why don't you tell us how long the average person who takes out a whole life policy ACTUALLY winds up keeping the policy in force and actually earns on their returns? Why don't you tell us what actual cash surrendur values are after 1 year, 3 years or 5 years, in case you change your mind?"
2. How about policies being written NOW in the current interest rate environment? I am willing to bet that the guaranteed minimum return is a a lot lower. How have the Variable Life or Variable Universal life policies done over "the last 10 years?" What are the guaranteed minimum returns like on those?



I dont think that I answered your bolded questions. First of all anyone who knows anything about cash value life insurance will tell you that if you buy this policy and cash it in within five years, you will have made a very very poor investment (you will see this on the illustration that I am attaching below). Also roughly 10-20% of customers do allow their whole life policies to lapse in the first five years. Again, this is the reason why those with limited means should not be involved in this situation. No one in a high income bracket is going to allow their policy to lapse or miss paying their premiums.

Lets look at an illustration. Keep in mind that all illustrations use projected numbers. In the cash value column I am including all commissions associated with the policy. I am using New York Life which is a very good company. In the invest the difference column I am assuming a rate of return of 4.6% (this does not include taxes). Keep in mind that the market has given an average return of 0.5% over the last ten years. The whole life policy is a $100000 policy as is the term policy.


Yr 1 Whole life premium $1178 Cash value 0
Term premium $137 Invested value $1089

Yr 3 Whole life premium $1178 Cash value $857 (return -19%)
Term premium $138 Invested value $3414

Yr 5 Whole life premium $1178 Cash value $3738 (return 12%)
Term premium $143 Invested value $5950

Yr 10 Whole life premium $1178 Cash value $11569 (return 7%)
Term premium $152 Invested value $13337

Yr 15 Whole life premium $1178 Cash value $20818 (return 6%)
Term premium $194 Invested value $22457

Yr 20 Whole life premium $0 Cash value $28363 (return 6%)
Term premium $217 Invested value $28363


Of note whole life premiums will stop at year 17. At year 20 both average annual returns are at 4.6%.


I think that this is an interesting illustration. I heavily weighed these projections to favor the investing group. Every commission and fee is already taken out of the cash value group's projections. I did not remove any administrative fees or any tax from the investing group (both of which would occur in the real world). Also at the end of the twenty year period the cash value group still has a life insurance policy and the investing group does not. The cash value group also has money in an asset protected vehicle and the investing group does not. If you use these projections and use the rate of return over the last 10 years from investments, then the investment group definitely comes up with the short end of the stick. The annual return in the cash value group are -10.7% at 5 yrs, 2 percent at 10 years, 3.7 percent at 15 years, and 4.6 % at 20 years.


Obviously this isnt for everyone but it does have a place in asset protection and wealth management in the wealthy.

 

[deleted126335]

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[mille125]

So you have an 8 million dollar malpractice policy and a five million dollar umbrella. At what point does one have so much malpractice insurance that they are no longer protecting themselves but are becoming a target. I dont know where you live or what most of the other physicians have for coverage, but if you have a large excess of protection compared to your peers you are in a risky situation. Attorneys go after deep pockets. Why do you think that the parent gets sued if an adult child crashes the car into someone? They go after deep pockets. If you have an 8 million dollar policy and three other doctors in the lawsuit have a 1 million dollar policy, who do you think the attorneys will target. Many times you may not even be at fault. Your strategy is fraught with risk.


Concerning your point about protecting your ability to earn a living in a lawsuit in excess of your limits, there are some strategies that you can employ. One is accounts receivable factoring where another entity actually "owns" your accounts receivable. This will protect your accounts receivable in such an event. Cash value life insurance will not protect your accounts receivable but neither will your approach.


Finally, I would like to ask why you do not feel that I am not comparing apples to apples. An accurate comparison would include the following:

Cash value approach: Rate of return minus administrative/setup fees
Term approach: Rate of return minus cost of term insurance minus administrative fees for investing difference minus taxes.


I did not include mutual fund administrative fees or taxes in the analogy. So I agree that I did not compare apples to apples. I tried to make the term approach more appealling (unrealistically so). I am glad that you like your approach as long as you realize that it is not perfect and that there are other approaches out there that can yield results equal to or exceed your current strategy. That is all that I am saying. I am not trying to convince you to change as you are happy. For those that are undecided or just entering practice, learn about both philiosophies and see which one suits you.

 

[Planktonmd]

So you have an 8 million dollar malpractice policy and a five million dollar umbrella. At what point does one have so much malpractice insurance that they are no longer protecting themselves but are becoming a target. I dont know where you live or what most of the other physicians have for coverage, but if you have a large excess of protection compared to your peers you are in a risky situation. Attorneys go after deep pockets. Why do you think that the parent gets sued if an adult child crashes the car into someone? They go after deep pockets. If you have an 8 million dollar policy and three other doctors in the lawsuit have a 1 million dollar policy, who do you think the attorneys will target. Many times you may not even be at fault. Your strategy is fraught with risk.


Concerning your point about protecting your ability to earn a living in a lawsuit in excess of your limits, there are some strategies that you can employ. One is accounts receivable factoring where another entity actually "owns" your accounts receivable. This will protect your accounts receivable in such an event. Cash value life insurance will not protect your accounts receivable but neither will your approach.


Finally, I would like to ask why you do not feel that I am not comparing apples to apples. An accurate comparison would include the following:

Cash value approach: Rate of return minus administrative/setup fees
Term approach: Rate of return minus cost of term insurance minus administrative fees for investing difference minus taxes.


I did not include mutual fund administrative fees or taxes in the analogy. So I agree that I did not compare apples to apples. I tried to make the term approach more appealling (unrealistically so). I am glad that you like your approach as long as you realize that it is not perfect and that there are other approaches out there that can yield results equal to or exceed your current strategy. That is all that I am saying. I am not trying to convince you to change as you are happy. For those that are undecided or just entering practice, learn about both philiosophies and see which one suits you.

8 Million malpractice insurance!!
You might as well walk around with a big bull's eye on your back.
Having more malpractice insurance does not protect you it only makes lawyers come after you.

 

[mille125]

8 Million malpractice insurance!!
You might as well walk around with a big bull's eye on your back.
Having more malpractice insurance does not protect you it only makes lawyers come after you.

This is exactly what I have been trying to tell Dr. Doze. This is the foundation of his asset protection strategy and I think that it is unwise. It is interesting how you complain about paying commissions for a cash value insurance product but are paying an untold amount for these bememoth insurance policies. You are putting yourself at risk.


Furthermore, in my state I could not get that much malpractice insurance even if I wanted to. This is just not a strategy. You need to talk to a professional ASAP.

 

[Jeff05]

how did you choose your financial advisor/accountant.
any suggestions.
please PM me if you are not comfortable sharing on open forum.
thank you.

 

[mille125]

how did you choose your financial advisor/accountant.
any suggestions.
please PM me if you are not comfortable sharing on open forum.
thank you.

Good question.....I say interview them just as you would a prospective partner..


At a minimum your financial advisor should be fee based with no affiliation with insurance products (otherwise you will not get a straight answer). Do not accept advice from any of these guys out their who wont charge you a fee. It is helpful if they have worked with physicians or at least have many clients in a high income bracket. Sometimes your state medical society can give you some references.

For accountants, again you want someone who as worked with physicians. Your state medical society may have some leads. Andrew Schwartz is a CPA who has put together a very good website called MD Taxes (www.mdtaxes.com). He gives very good free advice in his forums. He is very personable and may be able to give you leads for an accountant who works with physicians in your area. I believe that he is in Boston. You can contact him on his website.

 

[radslooking]

4.5% seems really low for invest portion. Especially when you are guaranteeing 5% for the cash value investments.

You may be right about 0.5% return on stocks the last 10 years. However, your goal was 20 years. The dow 20 yrs ago was 2.000. Now its 8000. someone smarter than me can do that calculation to be sure. But that's far better than tht 4.5% you are quoting.

to be fair, in 1968-1988 the return was worse. in '68 it was roughly a 1,000. So it only doubled over 20 yrs.

Anyhow, I still think that 4.5 is low, especially considering how low stocks are now.

 

[mille125]

4.5% seems really low for invest portion. Especially when you are guaranteeing 5% for the cash value investments.

You may be right about 0.5% return on stocks the last 10 years. However, your goal was 20 years. The dow 20 yrs ago was 2.000. Now its 8000. someone smarter than me can do that calculation to be sure. But that's far better than tht 4.5% you are quoting.

to be fair, in 1968-1988 the return was worse. in '68 it was roughly a 1,000. So it only doubled over 20 yrs.

Anyhow, I still think that 4.5 is low, especially considering how low stocks are now.

Very fair assessment. You are right that the market had an explosion from 1988 to about 1996. It was by far the biggest gain in history. 1998 to 2008 have had very modest gains. The principle question is what will the market do over the next 20 years. Personally, I dont feel that it will be higher than 4-6 percent given the world that we now live in (a more global economy). If it does perform at the 1998-1996 rate than stocks are the way to go. To be honest I feel that stocks would need to return 7-8% during that period to be even with the cash value return for those in the highest income bracket. If you feel that the return on stocks will be at that point or higher then by all means ignore my comments and proceed with stocks. It is also a question of how important insurance and asset protection are to you.


You are also correct in pointing out that I am looking at a 10 year comparison while the market is in a trough. Remember that 1998 was also a trough year.