How chiropractors can structure assets to withstand lawsuits and provide estate and tax benefits

Different professionals have different liability worries. Store owners are most concerned with premise liability, MDs with malpractice liability, and business managers stress about employee liability. Private-practice chiropractors worry about all of these liabilities.

According to a survey conducted by the American Chiropractic Association,1 more than 70% of the nation’s 50,000 chiropractors are in solo private practice. If you own a private chiropractic clinic with employees, you have a range of potential lawsuits that dwarf those of MDs employed by hospitals. For example, slip, trip, and fall; wrongful termination; respondent superior; and even sexual harassment lawsuits can produce large judgments.

No matter the source of the suit, health care professionals are usually troubled by being sued. The healing arts practiced in chiropractic clinics are vastly different from the competitive, contentious, and often unjust courtroom process. For this and other reasons, I gave up suing doctors last year and have begun teaching them about asset protection.

Myths of Asset Protection
Some chiropractors are under the false impression they can transfer property out of their names if they are sued, a tactic that can be deemed a fraudulent conveyance.

If an accident occurs on the adjusting table, it is already too late to rearrange the ownership of your home. Timing is the key to whether or not courts uphold asset protection measures taken by DCs. If the timing is to hide assets from suits already filed, it is fraudulent. But ironically, courts often rule the same asset protection procedures taken by individuals before a potential lawsuit occurs to be not only justified, but also smart, strategic, and excellent tax planning.

Some suppose that asset protection is as simple as transferring a home to the name of a spouse or child. While some professionals may use such tactics, true asset protection—as it is taught in academia and practiced by a small group of lawyers—is not so simplistic.

In my experience as a tax practitioner, a senior trial attorney for the IRS, and a medical malpractice plaintiff attorney, I have seen firsthand asset protection measures that will save doctors’ assets and those that will not. And what is unknown to many outside the legal profession is that a highly sophisticated asset protection plan will often discourage attorneys from filing lawsuits in the first place.

Protect You and Your Own
Asset protection means structuring personal and professional assets into legal entities strategically drafted to protect assets from creditors. Its principles are founded in tax legal tools used in estate planning that have been expanded to include asset protection. Its history goes back to the tax reduction techniques used by the wealthy and informed since the 1910s.

The best example of this sort of protective entity is a modern family limited partnership (FLP), which was created by Congress in 1916 to provide estate and tax benefits. Today, specialized attorneys have retooled the FLP to include lawsuit protection powers. With almost 90 years of case law surrounding it, the FLP has emerged as a tremendously powerful choice for lawsuit-prone professionals to own family homes, brokerage accounts, and other assets.

FLPs are structured somewhat like a family business with one or more general partners controlling all of the assets and the income distribution of the partnership. In families of chiropractors, the general partner is often the doctor and the other family members function as the limited partners.

Normally, if a lawsuit is filed against a chiropractor and the plaintiff wins, the judge would issue a turnover order in which nonexempt property including the home, stocks, bonds, and bank accounts could be turned over to the plaintiff. However, if all of the chiropractor’s property is held within carefully drafted, asset protection FLPs, the law in all 50 states prohibits that property from being seized, sold, or turned over.

In fact, the terms of a carefully drafted FLP give plaintiffs only one remedy to collect on their judgment, namely, the charging order. This means that the plaintiff’s only right is to receive income distributions from the FLP, which are made at the sole discretion of the general partner. In other words, doctors have the power to elect not to distribute income to the plaintiffs, resulting in the plaintiffs receiving nothing.

To add insult to injury, because of IRS Revenue Ruling 77-137, the plaintiff who obtains a charging order against an FLP is required to pay taxes on this phantom income, which is the income of the FLP even though the plaintiff does not receive any income at all. The results to the plaintiff is not obtaining any assets or income and also being liable for the tax bill on the income they have not received.

The disclosure of an FLP to a plaintiff’s attorney is a great deterrent to the filing and/or settling of a lawsuit against chiropractors. The FLP has been upheld time after time in court cases across the country.

As mentioned before, there is a difference between a plain vanilla FLP drafted for tax reduction purposes and one drafted for lawsuit protection.

Fringe Benefits
FLPs have other benefits besides lawsuit protection. FLPs can also provide tremendous estate planning and tax reduction benefits. For example, a FLP can legally spread or gift portions of your estate into your children’s tax brackets. This can reduce the taxable value of your estate to zero, preserving your hard-earned wealth for heirs.

In addition, the interest of an FLP can be conveyed to your existing living trust. This allows assets owned by an FLP to pass to heirs without the long and expensive process of probate.

Asset protection specialists familiar with your state laws will be able to help you implement these techniques without sacrificing tax benefits.

But be sure to ask the right questions. Less than one tenth of 1% of all attorneys in the United States even claim to specialize in this field.2 Make sure your advice comes from both competent and specialized professionals.

The recent hybridization of tax benefits with asset protection is a windfall benefit to high income, lawsuit-prone professionals, such as chiropractors. Lawsuit awards were $233 billion in 2002, a sum about twice the size of the economy of Ireland.3 If chiropractors are serious about keeping their homes and clinics from being included in this statistic, they must take the necessary steps toward financial protection.

With the right combination of legal and financial education, chiropractors can learn to use the legal system and not be abused by it.

Robert K. Dowd, JD, LLM, received a bachelor’s degree from Harvard College, a juris doctor from Boston College, and a master of laws in taxation from Boston University. From 1974 to 1978, he served as a senior trial attorney for the Internal Revenue Service. Dowd is now a speaker for the National Medical Foundation for Asset Protection, a firm that teaches medical groups lawsuit protection and tax planning principles. He can be reached at (800) 296-7009.

References
1. Jackson P. Summary of the 2000 ACA professional survey on chiropractic practice. JACA. 2001;27–30.
2. Martindale-Hubbell Law Directory. New Providence, NJ: Reed Elsevier Properties Inc.
3. US Tort Costs: 2003 Updates. Trends and Findings on the Costs of the US Tort System. Tillinghast, a Towers Perrin Co. Available at: http://www.towersperrin.com/tillinghast/publications/reports/2003_Tort_Costs_Update/Tort_Costs_Trends_2003_Update.pdf. Accessed August 27, 2004.

This article is written with the understanding that neither the author nor the publisher is engaged in rendering legal or accounting services.