- You can protect yourself and your family from the risks of potential litigation.
- Irrevocable trusts are one of the strongest ways to shield wealth from litigation.
- Irrevocable trusts can also provide significant tax advantages by removing an amount from the taxable estate.
Physicians, especially those who run a successful medical practice, are the targets of lawsuits more frequently than members of the general public.
According to the Medscape Medical Malpractice Report, 40% of the 1400 physicians interviewed had been named in a malpractice suit or a party to a suit at some point in their career. 1 According to the Journal of Law, Medicine, and Ethics, between 10,000 and 15,000 suits were filed annually during the period between 2000 and 2009. 2 By all accounts, the number of suits filed annually is decreasing.
Nonetheless, the experience of being sued can be devastating both emotionally and financially. Physicians who have been through it report that it is significantly traumatic. So, it makes sense to protect yourself and to minimize the potential pain, by taking a few steps before any trouble arises. A little planning can go a long way in protecting you and your family from the worry of litigation.
One step you can take is to create an irrevocable trust, or a set of irrevocable trusts. “An irrevocable trust offers very strong asset protection. It can also offer tax benefits,” said Michael Berry, ChFC, principal of Flagpole Capital and Michael Scott Financial and a special advisor to MDAlert.com. “It will almost certainly protect the assets contained in the trust from any lawsuit.”
An Irrevocable Trust Provides Strong Asset Protection
Irrevocable trusts are outstanding asset protection tools. Once an irrevocable trust is established, the person who creates and funds the trust abandons the ability to undo the trust and reclaim property transferred to it. So, you lose control the assets contained in the trust but you can dictate how and when they will be disbursed. With an irrevocable trust, the grantor loses both control of the trust assets and ownership. Also, transferring assets to an irrevocable trust may initiate significant gift tax issues. Consult your tax advisor.
How Irrevocable Trusts Protect Assets
Irrevocable trusts protect assets because an established irrevocable trust cannot be altered or undone. Creditors cannot step into your shoes and undo the trust any more than you can. Assets in an irrevocable trust are immune from creditor attack, lawsuits, and other threats against the grantor.
The Essential Clauses of an Irrevocable Trust
There are two clauses that are seen as essential for an irrevocable trust to include in order for it to be effective. These clauses work to shield the beneficiaries from creditors.
Spendthrift clause
The spendthrift clause allows the trustee to withhold income and principal—which would ordinarily be paid to the beneficiary—if the trustee feels that the money could or would be spent frivolously or seized by the beneficiary’s creditors.
This clause prevents a wasteful beneficiary from spending trust funds or wasting trust assets. This is especially important to many investors who set up trusts with their children as beneficiaries. If you are concerned that the assets in a trust left to your children would be wasted if not controlled, then use a spendthrift clause. The trustee can then stop payments if the child spends too quickly or unwisely.
The spendthrift clause can also protect trust assets from the beneficiary’s creditors by granting the trustee the authority to withhold payments to a beneficiary who has an outstanding creditor. If the beneficiary and trustee are at arm’s length, the creditor has no power to force the trustee to pay the beneficiary. The creditor only has a right to payments actually paid by the trustee and cannot force the trustee to make disbursements.
Anti-alienation clause
An anti-alienation clause can also protect trust assets from the beneficiary’s creditors. Specifically, the anti-alienation clause prohibits the trustee from transferring trust assets to anyone other than the beneficiary. This would include creditors of the trust beneficiary.
The spendthrift clause allows the trustee to withhold payments if a beneficiary is indebted. The anti-alienation clause prohibits the trustee from paying trust income or principal to anyone other than the named beneficiary.
Trusts for Multiple Generations
An irrevocable trust may continue for multiple generations, providing ongoing asset protection, if it is drafted properly. A dynasty trust is an example of such a trust. In a dynasty trust, sub trusts are created for each beneficiary in subsequent generations. Under the terms of these sub trusts, the subsequent beneficiaries’ inheritance can be asset protected.
For more information, contact Michael S. Berry, ChFC. He is a managing member of Michael Scott financial, LLC and Flagpole Capital, LLC, a registered investment advisory firm. He is also a special advisor to MDAlert.com. Mike was recently named one of the “150 Best Financial Advisers for Physicians in 2014” by Medical Economics. You can reach him at mberry@msf-advisors.com or (855) 449 7100.
