Asset Protection for Hard Times

The turmoil in the financial markets combined with a steep recession is hitting most of my clients pretty hard. Some have lost more than half of their retirement savings from the plunge in both stocks and real estate values. And many are concerned about the impact of the economy on their practice.

Much of our legal work now involves fi guring out whether there are any particular risks and potential dangers that we should be guarding against. Specifi cally, are there areas of your practice or outside investments that might increase your lawsuit liability risks? How should we structure business activities and personal assets to protect against the fi nancial risks that are now posed? The first step is to accurately identify and evaluate the extent of any new risks that come with the changes in the economy.

Active investments

If you are an active investor in a business or real estate project, your liability risks are magnifi ed by the current circumstances, particularly if you made a substantial real estate investment within the past few years. Now, with falling prices and a frozen credit market, many are agonizing over the decision of whether to pump in more money to carry the deal or to call it quits and walk away from a rapidly sinking investment. Even if you walk away, you’re still on the hook for the full amount of the loan, and most lenders are not going to let you walk away. What we’ve seen in our practice is that when the value of a property is less than the loan amount, the lender will generally pursue any defi ciency, unless specifi cally barred by state law (read “Protecting Against Real Estate Losses” at www.rjmintz.com/pdf/realestate.pdf). Should you put in more money now and hope the market comes back or walk away and fi ght it out with the lender? A big part of that decision may come down to the strength of your prior legal planning.

Passive investments

Even if you’re not actively involved with an investment, it’s a good idea to understand what responsibilities you may have if things go wrong. What type of entity holds the investment: a corporation, limited partnership, or limited liability company? Have you personally guaranteed any loans? Do you have an obligation under the operating agreements to contribute additional cash if needed? Make sure you have a good handle on the current operations of all of your investments and are clear about potential risks and your obligations.

Medical practice

Your malpractice liability probably doesn’t change much, but look into whether your liability insurer is still on solid fi nancial ground or has been hurt by the stock or credit markets. Many of our clients are experiencing slower payments, more delaying tactics, and more denial of coverage. Some of my clients are oncologists who front enormous drug costs every month on fairly tight margins, and they feel that any additional cutbacks or payment delays will seriously impact their practices. Even physicians without insurance concerns may face a decline in demand for discretionary treatment. Consider whether your practice is vulnerable to a squeeze in cash fl ow and whether you may need to increase your borrowings, if available, or out-of-pocket contributions.

Planning strategies

In a tough recession, business profits decline and potential obligations and liabilities increase. Before problems arise, make sure that appropriate legal planning insulates you from personal liability to the greatest extent possible. That means choosing the proper entity. General partnerships usually provide the least protection and expose you to the greatest amount of risk. A LLC, in many situations, has the best level of protection with the fewest requirements and formalities.

Make sure that personal assets exposed to a risk of loss from bad deals are insulated and shielded from potential claims. Many strategies can accomplish this result, and you can see an outline of the basic planning in our previous articles (read “Asset Protection Strategies” at www.rjmintz.com/MDNetGuideMarch2004.pdf). The goal of a sound legal structure should be to avoid jeopardizing accumulated (and future) savings from a business deal or something in your practice that ends up with unforeseen losses and liability. Discuss with your attorney whether your legal planning is up to date and appropriate for these tough times.

Robert J. Mintz, JD, is an attorney and the author of the book Asset Protection for Physicians and High-Risk Business Owners.To receive a complimentary copy of the book call 800-223-4291 or visit www.rjmintz.com.