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Fear Not – Dispelling the Myths of
Physician Liability and How to
Minimize Exposure with Proper
Planning
Prepared and Presented By
David M. Dvorak and Alexander J. Wolf
Attorneys
Koley Jessen, P.C., L.L.O.
February 28, 2012
Required IRS Circular 230 Notice: Any advice expressed as to tax matters was neither written nor intended to be used, and cannot be used,
by any taxpayer for the purpose of avoiding penalties that may be imposed under U.S. tax law or otherwise complying with IRS Circular 230.
Copyright 2012
(Doc # 630570)
Outline of Presentation
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Understanding the Exposure
Practical Solutions to Address Liability
Basic Estate Planning Concepts
Advanced Wealth Transfer Planning
Techniques
Categories of Exposure
• Common Liability
• e.g., car accident, sidewalk slip
• Contractual Liability
• e.g., individual debt, personal guaranty
• Medical Malpractice
Nebraska Medical Malpractice Laws
• Nebraska Hospital-Medical Liability Act
• Caps the total amount of damages
recoverable in a medical malpractice lawsuit
against “qualified” health care providers at
$1,750,000 per occurrence
• Also caps the liability of “qualified” health care
providers at $500,000 per occurrence
• Remaining liability, if any, will be paid by the
Excess Liability Fund
“Qualifying” Under the Act
• Health Care Providers must obtain
Professional Liability Insurance with
coverage of at least:
• $500,000 per occurrence
• $1,000,000 aggregate for all occurrences in a
given year
• Must provide proof of such insurance
coverage to Neb. Department of Insurance
“Qualifying” Under the Act (cont.)
• Health care providers must annually pay a
“surcharge” equal to a predetermined
percentage of the physician’s annual
malpractice insurance premium to the
Excess Liability Fund
• The surcharge percentage is set annually
• For 2012, surcharge is 20%
“Qualifying” Under the Act (cont.)
• Health care providers must display an
approved notice in their offices to notify
patients that they are qualified and patient
will be subject to the Act unless the patient
files a refusal to be bound by the Act with
the Department of Insurance
Consequences of the Act
for Health Care Providers
• Generally, qualified health care providers
should not be in danger of attachment
from medical malpractice suit
• The Act limits liability of health care providers
to $500,000 per occurrence
• Under the Act, physicians are required to
carry insurance with coverage of at least
$500,000 per occurrence and $1,000,000 per
year
Example
• Patient successfully sues primary physician and
hospital and is awarded $5 Million by the jury
• First, the jury award is reduced to the statutory
maximum of $1.75 Million
• Then, both the physician and the hospital
(through their insurance) must each pay
$500,000 (the maximum per occurrence per
provider)
• The remaining liability ($750,000) will be paid by
the Excess Liability Fund
Remaining Risks
• Patient Opt Out
• Patients may opt out of the Act
• Damages are not limited to $1,750,000
• Health care provider liability not limited to
$500,000
• Inadequate Insurance Coverage
• Minimum insurance coverage amounts
required by the Act ($500k/occurrence;
$1M/year) may be inadequate
Remaining Risks (cont.)
• Practicing Outside of Nebraska
• Protections under the Act do not extend to
other states
• Other states’ protection vary widely
• Iowa has no cap on damages
• Constitutionality of the Act
Practical Solutions to Address
Physician Exposure
1. Maintain proper liability insurance coverage
2. Utilize life insurance
3. Maximize contributions to qualified
4.
5.
6.
7.
8.
retirement plans
Split assets between spouses
Using multiple business entities
Family business entities
Basic estate planning
Irrevocable trusts
Maintain Adequate Liability Insurance
• Personal Coverage:
• Home and Auto
• Umbrella
• Business Coverage:
• Commercial General Liability Insurance
• Professional Malpractice Insurance
Umbrella Insurance
• Supplemental coverage that gives policy
holders added liability protection over and
above their existing home and auto insurance
• Reasonably priced because it typically only
“kicks in” once your basic policy limits have
been met
• Recommendation:
• Umbrella policy of $5M or more
Life Insurance
• In Nebraska, proceeds from a life insurance
policy are generally not subject to the claims
of the deceased insured’s creditors when the
beneficiary is a spouse or relative and not the
insured’s estate
• Recommendation:
• Industry “rule of thumb” is 10x earnings
• Proper titling and beneficiary designations are
key
Qualified Retirement Plan Assets
• Assets in qualified retirement plans are
generally granted special protection from
creditors
• Also, assets in qualified retirement plans are
generally eligible for favorable tax treatment
• Recommendations:
• Maximize contributions to QRPs
• Leave in QRPs until used or distribution is
required
Split Assets Between Spouses
• In Nebraska, the creditors of one spouse will not
normally be able to attach to assets of the other spouse
• In other words, the non-physician spouse will be able to
maintain ownership of assets in his/her name
regardless of the outcome of claims against physician
spouse
• Recommendation:
• Consider transferring some assets (e.g., personal
residence) to non-physician spouse
• Note: exposes assets to non-physician spouse’s creditors
Using Multiple Business Entities
• One entity for the medical practice itself; one to
hold and lease real estate; one to hold and lease
medical equipment; could even use separate
billing company to protect accounts receivables
• Bifurcates liability and possibly gain tax benefits
• Balancing complexity with protection
• Recommendation:
• For private practice, we always recommend at a minimum, that
separate entities be established for (i) the practice itself, and
(ii) the real estate
Family Business Entities
• Establish a limited liability company to own and
manage real estate and marketable securities
• Creditors limited to “charging order”
• Potential downside:
• Added complexity and expense to set up
• Heightened scrutiny from IRS
• Recommendation:
• Given right assets/circumstances an FBE can be a
great tool for a physician family
What Every Physician Should Have:
A Basic Estate Plan
• Ensure objectives are accomplished
following death
• Provide certainty for family members
• Minimize complexity and costs associated
with post-death administration
Basic Estate Planning Concepts
• General Thoughts on Estate Planning…
• Involves the thoughtful transfer of assets
during life and / or at death
• One size does not fit all
• It is a process
What Does Estate Planning Involve?
• Three Main Components
• Titling Arrangements
• Joint tenancy with rights of survivorship vs. Tenants in Common
• Separately-owned
• Titled in trust
• Beneficiary Designations
• Life insurance policies
• Retirement accounts
• Estate Plan Documents
Estate Plan Documents
• Last Will and Testament
• Trust Agreement
• Durable Power of Attorney
• Advance Directive
• Living Will
• Health Care Power of Attorney
-All may be revoked / revised at any time until incapacity or death
Trust Agreement
• Establishes a revocable, inter vivos trust
(a.k.a. a “living” trust)
• What is a trust?
• Device whereby a “trustee” manages property for the benefit of one
or more beneficiaries
• Why use a trust?
• Offers incredible flexibility in management and disposition of assets
• Serves as “will substitute” and allows for specific intentions of
“settlor” to be achieved
Typical Trust Terms
• During my life:
• Use trust assets for my benefit
• Following my death:
• Distribute assets outright to spouse, if spouse survives me
• If spouse does not survive me, split assets into as many equal
shares as there are living children and deceased children who have
surviving descendants
• Shares for children/descendants held in trust; distribute ½ of
principal at age 25, remainder at age 30; in the interim, use assets
for health, education, maintenance and support of the children
Tax Update
• 2010 Tax Relief Act provides some relief…
for now
• Congress acted in late 2010 to provide temporary
relief from transfer taxes
• Reunification of the Estate, Generation-Skipping
Transfer and Gift Taxes
• $5M exemption (as opposed to $1M)
• Rate of 35% (as opposed to 55%)
• Introduced “Portability”
• Provisions scheduled to “sunset” at the end of 2012
$6,000,000
60%
$5,000,000
50%
$4,000,000
40%
$3,000,000
30%
$2,000,000
20%
$1,000,000
10%
$0
0%
2001 2002 2003 2004
2005 2006 2007 2008 2009 2010* 2011 2012 2013
Year
* - In 2010, the taxpayer may choose between having no estate tax apply (i.e., but subject to modified
“carry-over” basis rules) or having the estate tax apply at 2011 levels (i.e., subject to “stepped-up” basis)
Maximum Tax Rate
Applicable Exclusion Amount
Tax Update – A Historical Perspective
Lifetime Gift Tax Exemption
Estate Tax Exclusion
Maximum Tax Rate
Tax Update – Predicting the Future
• What to expect…
• To avoid the significant impact that the “sunset” of
the 2010 Tax Relief Act would have on many
American families, Congress will need to act prior to
December 31, 2012 to enact more permanent
legislation
• Permanent exemption of $3.5M - $5M, indexed for
inflation?
• Portability?
• The unexpected
Wealth Transfer Planning
• The “Perfect Storm”
• Record high exemption/exclusion
• Record low interest rates
• Depressed or moderate asset values
• Wealth Transfer Opportunities
• Annual gift tax exclusions ($13k / year)
• Payment of tuition directly to qualified educational
organization
• Use of Irrevocable Trusts to make significant
lifetime gifts
Irrevocable Trusts
• Can be great tool in estate planning and asset
protection planning
• Can put assets beyond the reach of creditors
• Can limit estate tax liability and serve as liquidity source
• Examples
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Asset Protection Trust (domestic/foreign)
Irrevocable Life Insurance Trusts (“ILITs”)
Intentionally Defective Grantor Trusts (“IDGTs”)
Grantor Retained Annuity Trusts (“GRATs”)
Asset Protection Trusts
• Domestic Asset Protection Trusts (DAPTs)
• Some states (e.g., AK, DE, NV and SD) have enacted
statutes allowing individuals to establish “spendthrift”
trusts that are “self-settled”
• Benefit is likely limited unless a resident of such
states and/or assets are located there
• Foreign Asset Protection Trusts
• Some foreign jurisdictions (e.g., Cook Islands, etc.)
allow U.S. citizens to establish offshore APTs
• IRS scrutiny can be considerable risk
Irrevocable Life Insurance Trusts
• Trust established to own life insurance on
the life of the settlor
• Policy excluded from creditor claims of Settlor (or
the Trust beneficiaries) during Settlor’s life
• Upon Settlor’s death, proceeds are not included
in Settlor’s taxable estate, or subject to creditor
claims of Settlor or the Trust beneficiaries
• Irrevocable by Settlor
• Some expense and complication
Legacy Trust
• Irrevocable Trust established by Settlor
• Income tax paid by Settlor
• Beneficiaries include Settlor’s spouse and children
(considerable flexibility can be given to adjust allocation
among beneficiaries)
• Settlor allocates lifetime gift tax exemption (and GST
exemption) to shelter gift to Trust for multiple
generations
• Initial gift requires valuation and filing of gift tax return
• Subsequent sales to Trust allow for further wealth transfer
free from estate and GST taxes
Questions??
Thanks for your attention!
Alexander J. Wolf
David M. Dvorak
Attorney
Attorney
Koley Jessen, P.C., L.L.O.
Koley Jessen, P.C., L.L.O.
1125 S. 103rd St., Suite 800,
1125 S. 103rd St., Suite 800,
Omaha, NE 68124
Omaha, NE 68124
[email protected] [email protected]
402-390-9500
402-390-9500