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Asset Protection for a Homebirth Midwife

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These are easy to read and understand and are beautifully presented.

These are some notes from some recent research into asset protection for homebirth midwives.

Obviously, Plan A is to be such a responsible midwife providing such stellar care that nobody would ever think of suing you.  However, even the perfect midwife may become involved in a case with an unexpected outcome, and parents or other family members may act out their grief, rage or frustration by suing you.

If you don't have any assets, then you don't need to worry much because you have nothing to lose.  I'm pretty sure that midwifery equipment or other assets involved in running your midwifery business are not available to creditors because you need them to earn your living.

But what if you do have other assets that you need to protect.

Again . . . back to Plan A . . . practice responsible midwifery so that you're less likely to be sued and less likely to lose a suit:

However, even the perfect midwife may have clients who turn out not to be the responsible people she thought they were, or there may be a grandmother at the birth who really doesn't support homebirth anyway and decided to sue you because the baby has stork bites.

What can you do to protect your assets so that you're an unappealing target for nuisance suits and so that your assets are protected in the case of a suit that might actually end up in court?

Here are some basics of asset protection for midwives:

Sadly, there is no way of organizing your business to protect your personal assets in a medical malpractice suit.  People will sometimes tell you that you're protected if you incorporate or form a Limited Liability Partnership, but you're not.

However, there is some good news.  From Asset Protection for Physicians and High-Risk Business Owners, "Retirement Plans: IRA and Keogh plans are granted an exemption to the extent of reasonable support needs. Corporate pension and profit sharing plans, formed under ERISA, are fully exempt from judgment creditors."  This is from the end of that web page, with a lot of other categories that aren't subject to seizure by creditors.

And registering your home as a homestead may offer some protection from creditors.  NOTE - Declaring your home as a homestead in California is different from applying for the homestead exemption on your property taxes!

For about $9, you can download the form to use in your state for declaring your home to be a homestead.  Here are some sites:

After you complete the homestead declaration, you'll need to have it recorded with your county recorder.  This is usually pretty simple - you can do it in person if convenient, or you may be able to get the form notarized locally and then mail it in.

 Here's the California Code about the limits of homestead protection from this web page about bankruptcy.

2. The "California Exemptions," CCP §§ 704.010 et seq.

A. Homestead, CCP §§704.710-704.995 — $50,000 to $100,000 in equity.
i. The debtor must be living in the property at the time of the filing of the bankruptcy.
ii. "Dwelling" can include a house, condo, community apartment project, a mobile home, motor home or boat, CCP §704.710.
iii. Exemption amount is $50,000 for an individual.
iv. Exemption amount is $75,000 for a head of household [debtor plus: (a) spouse; (b) minor child or grandchild; (c) minor brother or sister; (d) parents or parents in law; or (e) incapacitated relative].
v. Exemption amount is $100,000 for those over 65, those over 55 with gross annual income of less than $15,000, or the disabled.
vi. The debtor need not file a declaration of homestead in order to receive the homestead exemption; however, if the house will be sold prior to filing, a declaration of homestead must be filed before the sale and the sales proceeds segregated in order to exempt the proceeds of the sale (the bankruptcy must be filed within 6 months of the sale), CCP §704.960.

However, this really isn't much protection if you (and your spouse?) own a home with equity of more than $100,000.

So . . . what's a hard-working midwife to do?  Well, I got some advice from a helpful attorney friend that I'll pass along to you:

Practice as responsibly as possible, do not carry malpractice insurance and don't worry about trying to protect your home.

This advice seemed counterintuitive, but here's the rationale:

Having malpractice insurance makes you a more attractive target.  Realistically, if you're practicing responsibly and documenting well, there isn't going to be a strong case against you.  So any attorney taking the case on contingency is only going to be interested in BIG BUCKS!!!  And apparently the value of a midwife's home isn't big enough bucks compared to the limits of malpractice policies, so they'll take on other cases with bigger potential prizes.

AND . . . my attorney friend reassured me that no judge is actually going to make you move out of your home as judgment for a questionable lawsuit, even if damages are awarded.

If there were an easy way of protecting your assets, it would make sense to do that, but all the ways of protecting your assets essentially involve giving them away, which leaves you very vulnerable in other ways.  So . . . let's be careful out there!

Here's a really good overview of the issues for healthcare providers: Asset Protection for Physicians and High-Risk Business Owners from The Asset Protection Law Center

The Engel Ladder of Asset Protection Vehicles identifies the various tools available to the asset protection planner and arranges them in good-better-best fashion, in ascending order of efficacy. A list of each rung of the Engel Ladder of Asset Protection Vehicles beginning with the least effective form of asset protection and ascending to the most effective form is detailed below:
 Gifting (see Chapter 3).
 Joint ownership (see Chapter 4).
 Exemption planning (see Chapter 5).
 Swiss annuity or Swiss insurance product (see Chapter 6).
 Insurance (see Chapter 7).
 Family limited partnership (see Chapter 8).
 Domestic trust (see Chapter 9).
 Hybrid company (see Chapter 12).
 Stiftung or civil foundation (see Chapter 12).
 Foreign integrated estate planning trust (see Chapter 13).
 Expatriation (see Chapter 14).

Unfortunately, most of these involve giving away your money or encumbering your home in such a way that you may not have the flexibility of selling it to buy another home or even refinancing it.  In some cases, if you transfer ownership, the property may be reassessed at a much higher property tax rate, or you may lose the mortgage deduction from your personal income taxes.

 From Medical Economics - Protect your assets before you're sued

If Your Home Is Your Primary Asset

A strong form of protection is available with the use of a "Qualified Personal Residence Trust" (QPRT). This device is best suited to situations when there is a substantial estate tax problem and when the home (or a vacation home) has a substantial value. However, it seems to me it could also be used as a pure asset protection device for family real estate even when estate taxes are not a significant concern.

In a nutshell, the QPRT involves making a future gift of your residence (or a vacation home) to your children at the end of a term of years selected by you. The house is put into a grantor trust to hold the property until the term of the trust has expired. Until the end of the term of years, you continue to use the home. At the end of the term of years (selected by you), the home belongs to the beneficiaries of the trust - usually your children.

. . .

As crucial as asset protection is, though, it's important not to panic and spend money on unnecessary measures. Some assets enjoy more built-in protection than you imagine, and a doctor rarely loses his home to a creditor, says Mandell.

How do you keep creditors away from the family home? If you live in a state where you can own real estate under tenancy by the entirety, you're covered. Otherwise, look to state homestead laws, which put varying amounts of home equity out of a creditor's reach. In some states you must file for homestead status; in others, it's bestowed automatically. Florida, Iowa, Kansas, South Dakota, and Texas exempt the entire value of a debtor's home, although exceptions may apply, such as acreage limits. Most states, however, exempt only $10,000 to $50,000 worth of equity, says David Mandell. That's not much protection.

For greater peace of mind, consider putting the house in your spouse's name, if that move makes sense in your state. Other defenses include assigning the deed to a family limited partnership or similar entity (not ideal, since you risk losing valuable tax breaks), making your house unattractive to creditors by mortgaging it to the hilt, or creating a qualified personal residence trust. With a "QPRT," you give the house to the trust but continue to live there for a given number of years. A creditor theoretically could claim the right to either live in or rent out a QPRT house during that period, but probably would find this unattractive. At the end of the term, you either turn over the keys to the beneficiaries—presumably your children—or lease the house from them.

. . .

A doctor with an employer-sponsored retirement plan—401(k), defined-benefit, defined-contribution, profit-sharing, or Keogh—generally can breathe easy about those. As long as they comply with the federal Employee Retirement Income Security Act, such plans are off limits to creditors.

. . .

How a single physician can fend off creditors

Estate-planning experts say unmarried physicians can avail themselves of many of the asset-protection strategies that married couples exploit—domestic asset protection trusts, offshore trusts, even family limited partnerships.

"I've set up FLPs for single people, making them general partners with a 2 percent interest as well as limited partners with a 96 percent interest," says estate-planning attorney David Mandell of New York City. "A brother or sister would be another 2 percent limited partner."

An unmarried doctor can also shield assets inside a single-member limited liability company. "A doctor would be the managing member and own 100 percent of the LLC," says Mandell. Such a solo plan would benefit a doctor who has no family members to add to an FLP.

FLPs and LLCs allow single, widowed, or divorced doctors to pass wealth on to relatives and reduce gift and estate taxes in the process. Such doctors also should consider private annuities, says estate-planning attorney Stephan Leimberg in Bryn Mawr, PA. "You sell assets like real estate to your children in exchange for lifetime income, paid out in regular, fixed installments," says Leimberg. "This reduces your estate, and totally protects the assets from your creditors in all states, since you no longer own them." Creditors still have a shot at annuity payments, though in some states, they're protected.

Lots of estate planners will talk about living trusts, but these are revocable trusts.  And the rule of creditors is that if YOU can get to the assets, then THEY can get to the assets.

From Asset protection from malpractice liability By Joseph P. Nocola, Jr., JD, CPA

The second type of trust is referred to as an irrevocable trust. If properly drafted, an irrevocable trust will operate to protect the assets of the physician from the claims of litigants and creditors. In the case of an irrevocable trust, the physician must relinquish unfettered control over the assets. However, the trust can be drafted in such a manner that permits the physician some element of indirect control in certain cases. As most professionals will suggest, great care must be exercised in drafting and maintaining an irrevocable trust. In all cases, the income tax consequences, as well as all death tax consequences, must be considered by the professional who is engaged to design, draft and implement the trust.

To the extent that the physician is not interested in relinquishing control, the physician (if married) should consider converting title to his or her assets to a form of marital tenancy, such as tenancy by the entireties. In most states, creditors and claimants will not be permitted to gain access to assets that are titled in such a manner. As in the case of the irrevocable trust, however, careful planning is recommended. The federal estate tax law provides for a unified credit that operates to reduce the tax liability of the estate of a deceased individual, and most estate planning strategists agree that this credit is most powerful among spouses when certain asset amounts are retained in the individual names of each of the spouses. Therefore, caution must be exercised.

Through the help of corporate counsel, many physicians have determined that the most significant asset protection device exists through state statutes that permit the formation of limited partnerships, limited liability companies and restricted professional companies. The transfer of assets to one of these types of entities provides significant asset protection, since most states prohibit creditors and claimants from gaining access to the assets of these types of entities. The law of each state is different, however, and the physician must be careful to consult the law of the state in which he or she practices medicine, as well as the law of any other state in which the assets (such as real estate) may be located.

If you still think you should talk to an attorney about asset protection . . . How to Select an Asset Protection Attorney

This Web page is referenced from other pages containing related information about Money and Paperwork


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