Beware: Malpractice Lawsuits Can Derail Your Nest Egg

A significant worry to any practicing physician is the fear of being sued by a patient for medical malpractice. Although most practicing physicians have coverage under medical malpractice insurance, the constant worry is: Is the malpractice coverage I have enough to protect my personal assets? How much insurance is enough is another worry. With the increase in lawsuits filed — especially medical malpractice lawsuits — other options of protecting your assets may need to be considered. The following provides three other strategies for protecting your assets that do not involve purchasing additional malpractice insurance coverage.

Family Limited Partnerships

A very popular asset protection strategy is to establish a family limited partnership (FLP). In an FLP, you and your spouse and/or other family members can contribute investment assets and create a pool of assets and manage them in a partnership entity. Typically, the general partners are the doctor and spouse who, as set forth in the partnership agreement, maintain complete control and discretion over how assets and income are distributed. Although the general partners can take as much of the income or principle for themselves, there is no obligation to share with others. This includes plaintiffs in winning court cases if the FLP agreement has been written specifically for asset protection purposes. Also, winning plaintiffs must pay taxes on the “phantom” income they have been awarded. This detours the pursuit of a lawsuit against a physician who has an FLP in place.

Homestead Exemption

An FLP is not an ideal vehicle to take title to your personal residence. Mortgage interest deductions and the $250,000 per-spouse capital gains tax exclusion when selling your home at a gain are not allowed in an FLP. In most, but not all states, you can shelter your equity in your primary residence through the use of a Homestead Exemption. The amount of the Homestead Exemption varies by state, so it is important to determine your state’s amount so you can figure how much of your home is protected by the exemption. If the Homestead Exemption leaves some of your home equity exposed, another idea is to form a personal residence trust. Such trusts should protect you from claims against your home without forcing you to abandon your homeowner’s tax advantage.

Offshore Trusts

A riskier and probably more costly protection method is the placing of assets in offshore trusts. The risk is more IRS scrutiny and these trusts must also comply with the laws in the tax haven where the trust is set up, in addition to complying with U.S. tax laws and regulations.

Domestic trusts are viewed in a more favorable light and are likely to be less expensive than offshore trusts. As of now, 12 states have enacted laws that make domestic trusts alternatives to offshore trusts. While the laws are not identical in each state, they do provide protection.

Although these three options provide additional asset protection, please remember they must be set up before a physician is sued. They will not provide protection after the suit is filed. So, if you are concerned about lawsuits and protection, do not delay in deciding which, if any, of these protection devices work for you.

If you have any questions regarding setting up an asset protection strategy, please contact Nicki Chalik at 312.670.7444.

Health Insurance Marketplaces: What You — and Your Patients — Need to Know

JASON FLAHIVE, CPA

On Oct. 1, 2013, the Affordable Care Act’s (ACA’s) Health Insurance Marketplaces (Marketplaces) opened in states that have adopted them and on the federal government’s website at www.healthcare.gov. As a physician, you may find yourself discussing with your patients how to use these new Marketplaces.

Health Insurance Mandate

Beginning in 2014, the ACA requires Americans to have health care coverage unless they qualify for one of a handful of narrow exemptions. Here are some examples of exemptions:

• The premiums would exceed 8% of the individual’s income;
• The individual’s income is below the tax filing threshold; or
• The individual has a certified hardship.

If someone does not qualify for an exemption and does not have minimum essential coverage, he or she will owe a penalty of 1% of income (but not less than $95) in 2014. Your patients who are covered by Medicare, Medicaid or, generally, an employer’s health plan will meet the minimum essential coverage requirements.

Patients without such coverage can purchase coverage through a Marketplace. At www.healthcare.gov, they can find information about the insurance mandate and the Health Insurance Marketplaces, links to the state Marketplaces and online enrollment forms for the federal Marketplace if they live in a state without a Marketplace.

How the Marketplaces Work

Through a Marketplace, a patient can compare health plans in his or her geographic area. The Marketplaces offer a choice of four levels of plans provided by private companies. The level chosen affects the monthly premium costs and the portion of the bill the patient must pay for things such as hospital visits and prescription medications.

The level also affects total out-of-pocket costs — the total amount a patient will spend for the year if he or she requires a lot of care. For instance, a Bronze plan will cover 60% of covered medical expenses and the policyholder’s share will be the remaining 40%.

Here is a summary of typical out-of-pocket costs by level:

The higher the percentage of costs covered by the plan, the higher its premiums will be. For a lower-level plan, an individual pays a lower premium but has higher deductibles and copayments.

Premiums and Subsidies

The premiums for the plans depend on market competition, area costs of care, family size, age and smoking habits. Higher premiums cannot be charged because of pre-existing conditions or gender. As long as the premiums are paid, the patient’s coverage can never be dropped.

If a patient’s income falls between 100% and 250% of the federal poverty level ($11,490 to $28,725 for an individual), he or she may be eligible for a cost-sharing reduction subsidy, which can help lower the patient’s deductibles, copayments and coinsurance. In order to receive cost-sharing reductions, he or she must purchase a Silver plan in the Marketplace. Patients will still have a variety of plans from which to choose, but it must be Silver to be able to take advantage of the cost-sharing reduction subsidy.

Many patients will qualify for premium tax credits, a type of subsidy that lowers their monthly premium. They may be eligible for this credit if their income falls between 100% and 400% of the federal poverty level ($11,490 to $45,960 for an individual).

All plans must offer a basic benefits package that includes prescription drugs, emergency and hospital care, doctor visits, maternity and mental health services, rehabilitation and lab services, and preventive care, among others. Specific plans may include additional coverage. Catastrophic plans are also available to those under age 30.

Comparing the Options

Through the Marketplace application process, your patients can compare coverage options side by side, learn if they qualify for income-based subsidies and tax credits, find out if they are eligible for Medicaid and/or the Children’s Health Insurance Program (CHIP), and enroll for coverage.

The first round of enrollment started on Oct. 1, 2013, and enrollment concludes on March 31, 2014, though this deadline might be extended because of the issues with the federal Marketplace site. In the future, the annual enrollment period will run from October 15 to December 7.

If you have any questions about the tax consequences if coverage is not purchased, please contact Jason Flahive at [email protected] or call him at 312.670.7444.