Medical And Dental Accounting: Asset Protection
Many doctors and dentists are concerned about losing everything they have worked for through a claim being made against them. In this article, we would like to explain what asset protection for medical and dental professionals entails and how you can achieve it.
What Is Asset Protection For Doctors And Dentists And What Are Some Of The Risks?
Asset protection means protecting your house and other assets from any potential claims from (most commonly) unhappy patients. Apart from patient claims, there is also increased risk from employing staff. Issues such as unfair dismissal or bullying are more commonly pursued nowadays, which may lead to legal claims being made against you as the employer.
What Are Some Of The Ways You Can Protect Yourself?
The first line of defense would be your insurances. Indeed, the best way to protect yourself is to have appropriate and adequate medical indemnity in place and to deal quickly with issues as they arise by seeking help from the insurer’s legal team.
For non-patient related risk, you can take out specific business insurance cover to protect yourself when employing staff, and you should discuss this with your general insurance broker. However, even though you can take out various insurance policies to protect yourself, you should still consider shielding your assets against any potential claims.
Alternative ownership structures
There is a saying that the key to asset protection is to own nothing and control everything. This is exactly why trusts – in particular discretionary family trusts – are so popular for high-income/high-risk occupations. The protective benefit of a trust is that if you have (debt) enforcement action taken out against you or you go bankrupt, assets in which you have an interest via a trust may be sheltered from such action.
A superannuation fund is also a type of trust structure and can offer valuable protection, particularly in the event of bankruptcy, unless you purposely made super contributions (that were out of character) to shield assets.
Traditionally, the family home is bought in joint names – you and your spouse. However, for better protection, it could be bought in the name of your non-medical spouse, or at least majority owned by him or her. For example, your family home could be owned 90% by your spouse and 10% by yourself. Keeping yourself on the title (even with 1% ownership) means the property cannot be sold or mortgaged without your consent. This gives you a significant element of control with very little ownership (risk). Please note for divorce purposes the ownership percentage is pretty much irrelevant.
Buying your main residence in a family trust or another entity is not really an option, as you lose the capital gains tax exemption – in other words if you sell the family home tax may then be payable.
The one exception where assets might be better held in the name of the medical or dental professional is negatively geared property. The tax deductions will typically be more valuable in the name of the doctor or dentist (who is on a high tax rate), and if the loan against the asset is fairly high compared to the value (say 90% or so), then there is not so much risk in this asset being pursued by claimants. In conjunction with this strategy, you could then build up assets in another entity or person’s name, which offers more tax and asset protection benefits.
Example: You may own an investment property that is worth $600,000 but has a $550,000 loan. The equity is only $50,000 in your name, and you receive associated tax deductions. At the same time, you may be building up other assets in superannuation, your family trust or your spouse’s name, where there is potentially no risk.
Whilst it is ok to choose the best ownership structure when acquiring new assets, what options do you have with regards to existing property and assets?
How Can You Protect Existing Assets?
Well, it is more difficult to transfer existing properties or assets as stamp duty and/or capital gains tax may be payable – often this a serious hurdle to overcome. For example, with an existing family home that is jointly owned, if you want to transfer it fully into your spouse’s name you will incur stamp duty depending on which state or territory you live in.
This is why you should always seek tax and financial advice before making these types of decisions, in order to get the full picture.
Asset protection for doctors and dentists is an important planning area and you should always seek advice.
Why not contact us for further information? We are Perth’s leading boutique medical and dental accounting firm. Contact Mitchell, our Principal via Mitchell@affluenceca.com.au.