DOCTORS IN
JEOPARDY
HOW DOMESTIC ASSET PROTECTION
TRUSTS SHIELD AGAINST MEDICAL
MALPRACTICE LIABILITY
A PRACTICE MANAGEMENT WHITEPAPER
SPONSORED BY PREMIER TRUST
A
n Alabama woman accidentally given opiates
during routine rehabilitation developed an allergic
reaction and died six month later; her family was
awarded $20 million in damages by a jury. Survivors
of a man in Mercer, Pennsylvania won a $6 million
judgment for medical malpractice when he died of multiple
organ failure during surgery to remove a small lump from his
chest. Two California siblings received a judgment of $1.75
million when their mother died of a stomach perforation
suffered during hiatal hernia surgery.
DOCTORS IN JEOPARDY
These are just a few large malpractice judgments
awarded during the last year or so, in amounts that
can bankrupt even the most prosperous medical
practice. Settlements reached outside of court now
average more than $425,000, while jury awards
top $1 million. Settlements are increasing
nationwide, according to Diederich Healthcare’s
2015 Medical Malpractice Payout Analysis. Total
payouts increased by 1.68% to $3.95 billion in 2015.
At the same time, premiums for malpractice insurance are soaring in many states, putting comprehensive protection beyond the reach of many doctors. In areas around New York City, malpractice
premiums for high risk specialties like OB/GYN’s
and surgerons top $100,000 per year, while physicians in these specialties in certain locations, such
as Miami, Florida, can pay nearly twice that.
Vincent D’Addona, CLU®, ChFC® and a senior
consultant at Strategies for Wealth, says that he
works continually with high net worth doctors and
medical professionals who are often unaware of
how vulnerable they are to malpractice liability.
“Most high income individuals (assuming they
have savings and investments) focus most of their
energy on accumulation,” he says. “This seems
logical, yet the reasoning is flawed. You must
protect your wealth as you go to keep from being
driven backwards.”
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Doctors, D’Addona explains, face particular
challenges. “Physicians are under unbelievable
pressure from legislation, reimbursement rates, and
other ‘practitioners’ who have not gone to
medical school. They leave medical school severely
in debt, have income that is less than expected,
have a largely unknown future, and have to be
careful about people who are going to try their
hand at the litigation lottery. Every dollar that a
physician makes is precious. Losing the dollars
they have accumulated is a more severe setback
today because of those pressures,” he says.
How can doctors protect themselves and their families from being wiped out by a medical malpractice
suit? Transferring ownership of assets like family
homes to spouses and other family members can
help. So can investing in defined contribution plans
like 401(k)s, which are off limits to most creditors
(but not to spouses in case of divorce). One
of the most powerful tools for protecting assets
against liability is the Domestic Asset Protection
Trust (DAPT), a linchpin strategy to weather
medical malpractice suits.
UNDERSTANDING DAPTS
A DAPT is a self-settled trust, structured so
that the creator of the trust is also the primary
beneficiary of the trust. The trust’s structure
prevents the grantor — as well as his or her
creditors — from directly accessing its assets.
DOCTORS IN JEOPARDY
However, an independent trustee who controls
trust distributions may (but is not required to) make
distributions to the beneficiary. As a result of this
structure, the trustee can refuse to make distributions at any time, including whenever a creditor, or
even a former spouse, makes a claim against the
trust. In the event of a malpractice liability claim, for
instance, the trustee could protect client assets
by simply refusing to make distributions
from the trust.
Trust laws enabling DAPTs are not available everywhere, and Oshins says that not all jurisdictions are
equally supportive. “The two top states for DAPTs
are Nevada and South Dakota, in that order,” he
says. “There are a few other states that are relatively close, but I can’t see any justification to go anywhere but to one of the top two states. Tennessee
and Ohio seem to be the next best states, yet they
hardly get mentioned among planners. Alaska and
Delaware are the other two states that get a lot of
the DAPT business.”
CHOOSING A JURISDICTION
D’Addona favors Nevada for DAPTs because it has
the shortest statute of limitations period among the
states that allow DAPT’s. This is the time that must
elapse between when assets are transferred to the
trust and when those assets should be protected
from the creditors of the trust. Nevada has a two
year statute of limitation whereas many other states
have a four year statute.
Not all states permit self-settled trusts, so it is
important that the DAPT be established in a jurisdiction that supports these trust structures. Sixteen
states now permit DAPTs, but a few stand out for
particularly good protection.
Steve Oshins, an attorney with Las Vegas,
Nevada based Oshins & Associates, LLC, says he
creates roughly ten asset protection trusts a
month for clients all over the country. “Since
doctors are sued so frequently, it is borderline
irresponsible for any doctor not to set up some
sort of asset protection vehicle,” he explains. “It
takes decades of hard work to get where they are,
yet in just one botched surgery they can have their
entire net worth wiped out if they don’t take the
right precautions.”
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A MIXED RECORD IN COURT
Physicians do not have to live in a state that
supports DAPTs to create one; however the law is
un-clear about how much protection these
structures offer to grantors from non-DAPT states.
For instance, in 2011, an Alaska court voided a
DAPT created by real estate developer Donald
G. Huber. Huber began funding the DAPT after his
business had started to founder, eventually
SINCE DOCTORS ARE SUED
SO FREQUENTLY, IT IS
BORDERLINE IRRESPONSIBLE
FOR ANY DOCTOR NOT TO SET
UP SOME SORT OF ASSET
PROTECTION VEHICLE
DOCTORS IN JEOPARDY
transferring substantially all of his assets, including
two homes, several shopping centers, shares in
com-panies, his real estate business, and $3
million in accounts receivable into the trust. Huber
lived in Washington State, a non-DAPT jurisdiction, where all of his assets were held. The court
ruled that creditors should have access to DAPT
assets. However, in Delaware in 2015, the Court
of Chancery denied creditors’ claims against three
DAPTs set up by a New Yorker who later moved
to Florida.
D’Addona says that DAPTs are, at the very least, a
road block to creditors, who may give up on assets
in them without even suing. “Michael Jordan has
been quoted as saying that you miss one hundred
percent of the shots you don’t take,” he says. “If
they don’t work … they are certainly a deterrent
and a negotiating point.”
HYBRID DAPTS OFFER
ADDITIONAL PROTECTION
For physicians who are concerned about whether
a regular DAPT will hold up, Oshins recommends the
additional protections of hybrid DAPT. These
irrevocable trusts are similar to regular DAPTs, except
that they do not initially name the grantor as a
beneficiary (typically the grantor names his or her
spouse or children as beneficiaries). However, hybrid
DAPTs nominate a “trust protector” who has the
power to name additional beneficiaries — including,
for instance, the trust grantor— at any time..
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As a result, if a physician is sued for malpractice
damages, the trust is off limits, because it does not
legally belong to him or her. However, once the time
limit for collecting has passed, the trust protector
can name the physician as a beneficiary and can
direct future distributions to him or her. Says
Oshins, “For a resident of a non-DAPT state, this is
state-of-the-art planning.”
DO YOU REALLY NEED A DAPT?
Not all physicians require the protection of a DAPT.
Some, who live in states where malpractice awards
are capped and insurance rates relatively affordable, may be better off simply buying insurance.
Joel Greenwald, an advisor who specializes in serving physicians through his firm Greenwald Wealth
Advisors in St. Louis Park, Minnesota, says that he
recently met with an emergency room physician
who was concerned about malpractice liability, but
that she ultimately decided against a DAPT.
“Most of my clients live in Minnesota and the
medical liability situation here is not too bad and a
lot better than in many other states,” Greenwald
explains. “Sometimes clients get interested in
these sorts of arrangements because they are
worried that their malpractice insurance will not be
sufficient. However, when they have an initial
visit with a lawyer they hear how complicated and
expensive these sorts of arrangements are they
are not interested in proceeding.”
BEST PRACTICES:
FIVE WAYS TO
STRENGTHEN DAPTS
Advisors who work with physicians
can increase the chances that the
DAPT will protect assets by following
these guidelines:
1 Start early: Some courts have rejected
DAPTs established after creditors were already circling, so it’s critical to protect assets
before they’re in jeopardy. Once you’re facing
a liability claim it may be too late.
2 Don’t be greedy: Placing all of a client’s
assets in a DAPT is another red flag for the
courts. Set aside enough to support the client’s lifestyle, but don’t try to shelter everything
they own in a DAPT.
3 Choose the right state: Some states
have better protections against creditors than
others. Nevada, for instance, allows creditors
just two years to collect judgments.
4 Establish an in-state presence: If your
client lives in a non-DAPT state, it can help
to hold some or all of your assets are held in
the state where the DAPT is administered.
Consider making a local institution custodian
for all or part of the assets in the trust.
5 Consider a hybrid DAPT: A hybrid DAPT,
with its flexible capacity for adding beneficiaries, can provide additional protection against
creditors.
DOCTORS IN JEOPARDY
Indeed costs can be a major consideration. Trust
and estates lawyers typically charge $10,000 or
more to set up a DAPT, and busy doctors may
balk at the amount of time they have to spend on
the planning process.
Add to that the fact that many physicians who
establish DAPTs never have the opportunity to use
them. Both D’Addona and Oshins admitted that
none of their clients who set up the trusts had been
sued for malpractice to date. “The probability of suit
is fairly low yet the order of magnitude of the potential
loss is high,” D’Addona explains. “I have been very
fortunate that none of my clients have had to test the
theory, and I hope it stays that way.”
Yet Oshins says that his clients are happy to have
the protection, even if they never have to use it
“When you compare the costs to buying liability
insurance and recognize that there is no liability
insurance that can match the benefits of a DAPT,
especially one set up under Nevada law, it should
be a no-brainer,” he says.
Oshins also cautions that focusing too much on
costs can be counterproductive. “Some people
will shop around until they find the lowest cost
attorney. You can not please everyone, and many
people do not see the different between an expert
and someone who just fills names into forms and
doesn’t have the experience and understanding of
the rules to do the same level job,” he says. “Ironically, when many of us pick a physician for a major
surgery, those of us who can afford it will generally
find the best physician availability irrespective of
cost because we value a major surgery in such
high regard, yet some physicians don’t understand
that the same differences in talent exist among
attorneys too.”
HYBRID DAPTS NOMINATE
A “TRUST PROTECTOR”
WHO HAS THE POWER
TO NAME ADDITIONAL
BENEFICIARIES
— INCLUDING, FOR
INSTANCE, THE TRUST
CREATOR — AT ANY TIME.
YOUR PARTNER IN ASSET PROTECTION
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