I recently discovered The White Coat Investor when they posted a favorable comment about our book “Asset Protection for Physicians and High Risk Business Owners”.  The site publishes excellent investing and personal finance information for medical professionals – but I think the content is very helpful for anyone interested in these subjects.

Why We Turn Down Clients

It’s true that we are in the business of providing legal advice and services and representing our clients, but there are many times when we just can’t accept a particular case. This seems to be happening a lot lately and this is a good opportunity for us to describe some of those situations for you.

Most of our new clients come to us through a referral from an existing client or from their own lawyer or CPA who has recommended that they speak with us. The fact that the relationship is based on a mutual, trusted source, certainly smoothes the process. We have to perform our own level of due diligence on every prospective client and a referral from a mutual source gives both sides an early and additional level of comfort.  In every sense, finding an attorney or, for that matter, a physician, an architect or any professional through a recommendation from a friend or advisor is always the best idea.

Some new clients contact us initially after visiting our website and spending some time reading the information presented and the articles and perhaps the latest version of the book which is available. Many prospective clients call us directly or send us an email describing their circumstances and what they would like our firm to help them accomplish, I read each of these emails very carefully and try to reply with our suggestions as quickly as possible.

Based on our understanding of the prospective client’s circumstances or goals, we may not be able to offer advice or schedule a telephone consultation or a personal meeting with everyone who requests it.  It’s our policy not to charge a fee for an initial consultation and that leads to many requests for telephone calls or meetings.  Sometimes, based on the information in the email or from what we learn on the phone, we find that we can’t or won’t be able to accept that individual as a client.

Fraudulent Transfers

For instance, due to the difficult economic times, many of those who contact us are involved in a lawsuit or have large debts that they would like to avoid. In these situations there is little or nothing that we or any other  legitimate attorney can do. Negotiations with the creditor or bankruptcy planning may be appropriate but those are not services we provide.

For asset protection planning, the law is very clear that transferring property or taking steps to defraud a creditor is a civil and possibly a criminal offense. Often the facts in these cases are heartbreaking, unexpected medical bills or simply bad luck or a bad economy, has resulted in bills or loans that the individual can’t reasonably pay off.  Although we are sympathetic in these situations, there is often no helpful asset protection solution that we can recommend.

Unlawful Conduct

In other cases we are not so sympathetic. Sometimes, we receive a call or email from an individual involved in questionable or clearly improper business dealings or behavior. These contacts are not from existing clients but are usually from those who have seen the website and would like a telephone call or a meeting to discuss activity that we consider unethical or disreputable in some fashion.

Asset protection and privacy are appropriate and legitimate strategies for minimizing liability risk and we are happy to represent clients in a wide variety of circumstances.  However, asset protection planning and privacy strategies cannot be used to evade taxes, launder money or facilitate fraudulent or criminal conduct. Although communications directly with prospective clients are covered by the attorney-client privilege, if it becomes clear to me that an individual is intending illicit activities,  I terminate the call or the meeting either politely or sometimes even not so politely. In these cases, I am not willing or able to offer legal advice and needless to say, I’m not going to schedule a meeting, paid or otherwise, to discuss the matter further.

If you are visiting the website and would like to discuss your legal situation, we will do our best to respond helpfully and we will let you know promptly, based on the information you provide, whether we can advise you on the matter. For those cases we can accept, a free initial telephone call or meeting may be appropriate. If we cannot help you for one reason or another, we will let you know that too. The relationship between an attorney and a client are based on reasonable expectations, trust and mutual respect and we do our best to uphold those standards in every professional relationship.

In August the Ninth Circuit Court of Appeals approved a a popular technique for reducing estate taxes.

Estate of Petter v. Commissioner

A bad business deal, divorce, medical problems or student loans can lead to financial disaster and a loss of any savings that you may have set aside for your children. Proper planning can immunize and shield these savings

More information

A growing focus of our practice in recent years is on asset protection planning for individuals to protect against medical expense related liability risks.

Medical expenses resulting from an illness or injury represent a serious threat to your home and savings.

Risks to Insured As Well As Uninsured

The potential financial disaster is clear if you’re uninsured. A trip to the hospital or any extended treatment can cause thousands or hundreds of thousands of dollars in medical bills (assuming you can obtain treatment at all). If the physician or the hospital does not arrange a payment plan before the treatment begins, it will, most likely, pursue collection reasonably soon after. Depending on the law of your state, the assets which can be seized include your home and savings and other personal property.

What continues to be less well understood is that even for those who are lucky enough to be insured under private plans or employer sponsored plans, the financial risk remains significant. A client seriously injured in an automobile accident spent several months in ICU and recovery. Total medical bills exceeded $1 million and, unknown to her, her private health plan had a lifetime cap of $500,000. The hospital was suing to collect the $500,000 uncovered balance of its fees. That’s about what she had in savings and equity in her home so everything was at risk.

The lifetime cap as well as substantial co-payment responsibilities is only one part of the problem. What happens if your insurer simply refuses to pay your medical bill? Does this ever happen?

According to a recently released study by the California Nurses Association, California’s largest insurers denied 13.1 million claims in just the first three quarters of 2010. That amounted to 26% of all claims submitted. For example, of these insurers, PacifiCare denied 43.9%–Cigna 39.6% and Anthem Blue Cross-27.3%.

“These rejection rates demonstrate one reason medical bills are a prime source of personal bankruptcies as doctors and hospitals will push patients and their families to make up what the insurer denies,” said CNA/NNU Co-President DeAnn McEwen. The data, new findings by the Institute of Health and Socio-Economic Policy, the CNA/NNU research arm, is based on data from the California Department of Managed Care.

What happens if you receive medical treatment which runs into the tens or hundreds of thousands and your insurer denies the claim? Who pays the doctor and the hospital?  Unless you were lucky or savvy enough to negotiate your agreement in advance, your provider will require that you guarantee full payment of the costs incurred, less any amount actually reimbursed by your insurer. Meaning, you’re on the hook for whatever your insurance company fails to pay. Of course you can fight it out and ultimately sue your insurance company but lawsuits take a long time and plenty of money that most people can’t afford.  That’s exactly what the insurer is counting on and why it’s more profitable to deny claims and defend the occasional litigation. The strategy of resisting a high proportion of claims is an essential and integral part of the business model of the health insurers.

When Patients Can’t Pay

What happens when a large medical bill can’t be paid?  Usually the outcome is a lawsuit filed by the hospital or collection agency with a judgment and a lien filed against the patient’s home and accounts. In most states, a percentage of the debtor’s employment earnings can be garnished. Generally, before this point is reached, the patient files a personal bankruptcy to stop the wage garnishment and wipe out the medical bills and other accumulated debts. But that requires that he give up all of his assets including savings accounts, real estate and equity in his home.  These assets, except those that are specifically exempt, are turned over to the Court and divided among the creditors.

According to a study by Harvard University, about half of the 1.5 million annual bankruptcy filings are caused by illness and medical bills. And surprisingly, three fourths of those had health insurance at the start of the illness which triggered the filing. “Unless you’re Bill Gates, you’re just one serious illness away from bankruptcy”, said Dr. David

Himmelstein – the study’s lead author and an associate professor of medicine. “Most of the medically bankrupt were average Americans who happened to get sick.”  

How Patients Protect Themselves

The high level of financial risk posed by an unpredictable medical event is now leading patients to take steps to protect their savings from this threat. For instance, I met with Mr. and Mrs. X last week, a couple in their early 50s. They have about $300,000 of equity in their home and $200,000 in savings. Mr. X is self-employed and Mrs. X works for a small company. Both are covered under her group plan, but, with rising costs, the company might cut back or terminate the plan sometime soon. Individual policies may be available at that point but the cost and extent of the coverage is unknown.  The goal of their planning is to protect their savings from large, unexpected bills at any point in the future.  Asset protection can often shield savings from these events, but the planning must be completed before the fact.

New Case Highlights Risks and Opportunities

By Robert J. Mintz
MDNetGuide – March 2011

Many physicians and other professionals use S-Corporations (S-Corp) to conduct their practice. For a number of reasons this is often a good idea (see “Pros and Cons of Professional Corporations” ). An S-Corp can help limit personal liability – not from medical malpractice claims – but from other obligations of the corporation. For example if your corporation leases office space or equipment, you have no legal responsibility for payment unless you have personally guaranteed the contract. A Limited Liability Company would achieve the same result but physicians are generally prohibited from practicing medicine in an LLC, so the choices for how to organize your practice are usually restricted to partnerships, sole proprietorships and corporations.

The traditional problem with corporations is that they are treated as separate taxpaying entities, which means that they have the potential to produce two layers of tax, once at the corporate level and again at the shareholder level. The corporate tax can produce some nasty and surprising tax problems, but fortunately, the law allows shareholders to opt out of the corporate tax by filing an S-Corp election if they meet certain qualifications. Under this treatment, all the income of the S-Corp flows through to the shareholder’s personal return and is taxed there – only once – similar to a sole-proprietorship or a partnership.

Profits or Wages?
With this long-standing and simplified tax regime it would seem that S-Corps should be easy to manage and free of significant tax issues. But, in fact, S-Corps have a unique hybrid status, capable of producing savings not available to other business entities. These benefits are created by particular grey areas within the tax law which treat certain types of business income more favorably than others. If income can be characterized to take advantage of the lower available rates, substantial savings can be generated.

More specifically, the income generated through an S-Corp and reported on the shareholder’s return can be classified as wages or as a profit distribution based upon a variety of factors. And the outcome of that determination matters a great deal because amounts treated as wages are subject to payroll taxes while profit distributions are not. Depending on the amount involved, the difference in taxes can be substantial. For example, in years after 2011, the FICA (Social Security) tax is 12.4% of the first $106,800 of salary and the separate Medicare tax is 2.9% of all salary without any upper limitation. If an S-Corp has profits of say $250,000, taking that full amount as salary results in combined payroll taxes of roughly $20,000. If the amount of salary was instead lowered to $50,000 with the balance claimed as a profit distribution, tax savings for the year would be about $11,000.

What is “Reasonable Salary”?
The issue in most cases turns on what is a reasonable salary under the circumstances? What amount of corporate income is properly allocable to invested capital and what amount represents income from the shareholder’s services? It’s not an easy question.

A recently decided case illustrates the way this issue has been treated. In David E. Watson P.C. v. U.S., Mr. Watson’s S-Corp was a partner in an accounting firm. In 2002 and 2003 the partnership distributed $203,854 and $175,470 respectively to Watson’s S-Corp. But rather than treating that amount as salary for his services, Watson claimed a salary of only $24,000 in each year with the balance labeled as profit distribution. Based on the payroll taxes then in effect, this resulted in a tax savings of nearly $20,000 over the two year period.

The IRS rejected this treatment and asserted that the reported salary of only $24,000 was unrealistically low in relation to the pay for other accountants with similar experience. The point was made that even accountants coming directly out of school make far more than the amount claimed. Ultimately the District Court decided that a reasonable salary amount for Watson should have been about $90.000 per year and full payroll taxes were due on this amount. The balance of the corporate income was treated as profit distribution.

Determining what is a profit distribution and what is salary is the subject of a longstanding game of cat of mouse between the IRS and taxpayers. The IRS’s position is that amounts of earnings attributable to corporate capital or assets may be properly classified as a profit distribution but that payments for shareholder services must be treated as wages.

In a medical professional corporation, it is often true that a large percentage of the income is related to services performed by the shareholder, but there are significant exceptions. If profits are generated by the services of non-shareholder employees or from charges for lab work, equipment use, the sale of products or from other investments, then income earned from these activities might not be related to the physician-shareholder’s services. In these cases, the allocation between profits and wages is subject to considerable interpretation and the amounts claimed for each can significantly impact the amount of payroll taxes which may be owed. Although Congress may take some steps in the future to clarify these issues, for now the outcome of disputes on this issue depends on the circumstances involved and you should certainly obtain the assistance of an experienced tax advisor when navigating the rocky landscape of tax strategies.

by Robert J. Mintz, JD

MDNetGuide – January 2011

The biggest obstacle to filing a lawsuit has always been money. Lawsuits cost a lot and most people just can’t afford it.  When legal fees are added to the costs of consultants and expert witnesses all but the wealthiest few would be hard pressed to cover the ongoing expenses of even the most routine business dispute or injury case.

Medical malpractice cases, in particular, are often among the most expensive for a plaintiff. Usually one or more medical experts are required for the initial evaluation of liability and then for ongoing advice and testimony in depositions and possibly a trial.  At expert rates of $500-$1,000 per hour and up, it is difficult for any plaintiff to mount a credible case without access to significant resources to finance these costs.

As we’ve discussed in previous articles, a partial solution to this affordability issue is the contingent fee agreement which shifts the up-front cost of the litigation from the plaintiff to the lawyer in exchange for a percentage of the recovery. This arrangement often works well for both sides. Many individuals who otherwise cannot afford to hire lawyers are able to achieve some measure of compensation for legitimate injuries.

The contingent fee business model works especially well for attorneys. Because of the inherent advantage of the plaintiff in litigation, the potential profits are limited only by the number of cases, good or bad, which can be effectively financed. Think of the plaintiffs lawyers as the house in a casino game. They have a built-in advantage and like the casino house, all they need to make lots of money is cash for financing and a steady supply of customers.

What happens when attorneys don’t have enough money to cover existing cases or to take on new ones? Within the past few years, lawyers, and other profitable business owners have had their bank credit lines tightened or closed so the sources of funds available to finance an inventory of cases has been severely restricted. Without easy access to cash, lawyers have been forced to reduce their case load, limiting the number of cases they can take and leaving lots of potentially profitable cases on the table.

Although the litigation business was once the exclusive province of the lawyers, the potential for large profits is attracting a flock of outside entrepreneurs with an appetite for risk, surplus cash and a willingness to supply ample funds in exchange for outsized returns. Historically low interest rates are encouraging individual investors, investment companies, hedge funds and even some specialty banks to enter the business of financing malpractice cases, personal injury claims, business litigation and even divorce cases. In exchange for supplying the attorney with the funds to fully litigate a case, these investors take a big share of the ultimate settlement or award.

For example, one company, Lawsuit Financial Corp., claims on its’ website that it is often able to supply funding for a case within an hour of receiving the case material. In addition to providing the cash for the litigation, the company also offers to provide advances to the injured client to relieve financial pressure and enhance “staying power” and settlement leverage. The company invites investor participation in funding specific cases with the prospect of generous returns.

Investors can also participate in cases where contingent fee financing is not practical or permitted.  For example, The Model Rules of Professional Conduct 1.5(d) expressly prohibit contingency fees in domestic relations cases where the fee is contingent on the securing of a divorce or obtaining a property settlement. The stated policy behind this rule is that the role of a lawyer in domestic matters should be to encourage reconciliation. As legal commentator Christine Hurt points out (http://www.theconglomerate.org/2010/12/financing-divorce-litigation.html ), if your lawyer only gets paid from a property settlement and the amount of the fee is based on a percentage of the total settlement, the goals of reconciliation and family preservation are even less likely than they are now.

Although the prohibition on contingent fees in divorce cases may make good policy sense, where there is a profitable market to be served, market demands can be counted on to outflank the ethics regulators. A recent front page story in the New York Times (http://www.nytimes.com/2010/12/05/business/05divorce.html?_r=1&scp=1&sq=divorce%20lending&st=cse ) profiled a start up Beverly Hills firm, Balance Point, which finances divorce litigation in return for a percentage of the ultimate recovery. According to Stacey Napp, company founder, the target market is female spouses seeking the cash to litigate property settlements in the $2 million to $15 million range.

Litigation has always been a profitable business for lawyers. But now outside investors – flush with cash and an appetite for more risk and profits then they can get from their savings accounts and stocks – are taking advantage of burgeoning opportunities for profits in the litigation business. While this is certainly great news for the plaintiff class, physicians and other potential “deep pocket” defendants may be facing a newly armed and cash rich adversary in the courtroom.

Some states  allow for the creation of a Private Retirement Plan, which is entirely exempt from judgments and bankruptcy. That is, retirement savings plans which are not IRS Qualified Plans, may be protected under state law if certain requirements are satisfied. According to the cases that have been decided, these plans must be carefully drafted and maintained, but they are highly flexible in design, need not cover other employees, and can include annual contributions that can substantially exceed those available under the qualified plans or IRAs. No tax deduction is available for these contributions, but that actually works in favor of asset protection since the plans are not subject to the strict funding and compliance rules of ERISA and the Internal Revenue Code. The complete exemption from judgments for amounts in these plans may be highly valuable in a wide variety of circumstances and should be considered as a stand-alone asset protection plan or in conjunction with a tax deferred account.

This exemption from judgment also applies to distributions from the Private Retirement Plan so the funds are protected while in the plan and later on in retirement, when the proceeds are withdrawn. As long as the funds can be traced to a distribution from the plan, they can be invested in any manner. For example, if you purchase a home or a boat or gold coins or any other asset with the proceeds, those assets are exempt from judgment.

Benefits of a Private Retirement Plan

• California residents are permitted by law to establish Private Retirement Plans which are exempt from creditor claims and judgments.
• All assets in the plan are completely protected from lawsuits and judgments—even in bankruptcy.
• The contributions to the plan are not tax deductible so:

1. No maximum limit on contributions.

2. No requirement for covering other employees.

3. No annual IRS filings.

• A Private Retirement Plan can be used instead of or in addition to an existing qualified plan.

You can maintain plan funds at whatever financial institution you choose, and you can choose to manage all investments.

A Private Retirement Plan we recently set up for a physician client provides an example of how this works. The client is forty-five years old, married with one child, and earns about $500,000 per year as a member of a local ob/gyn group. His goal was to save as much as he could for retirement in a protected vehicle. A Qualified Plan wasn’t feasible because of limitations on contributions and the cost of covering other employees. He wasn’t sure whether his current income would increase or decrease over time so we established a flexible formula in his plan based on a percentage of his net income over a certain threshold that allowed him to contribute a larger or smaller portion of his surplus cash each year, based on his circumstances at the time. The client hopes to retire at age sixty or earlier, and the plan documents provide that the proceeds can be distributed to him whenever his actual retirement occurs. In these particular circumstances, where the client wanted maximum but flexible contributions in a protected form, without additional employee or administrative costs, the Private Retirement Plan was a good fit with his financial goals. We also considered the fact that for obstetricians, potential malpractice liability continues even after retirement as the statute of limitations is tolled until the patient reaches age eighteen. With continuing liability from an extended term, the ability to withdraw funds at retirement with the proceeds fully protected was an additional benefit of the plan.

Our first Asset Protection Newsletter of the year was issued yesterday.  The lead article         Do Your Kids Need Asset Protection has a discussion about protecting children from liability issues such as student loans, business risks and future divorce.

You can find all our previous newsletter articles here