Protecting Your P.A. Assets From Malpractice Judgments January 2003 By: Marc Singer, MBA, CFP Many physicians in Florida anticipate lowering or have already lowered their malpractice coverage to either $250,000/$750,000 or have self-insured (gone "bare"). While many have already taken steps to protect their personal assets from malpractice judgments in excess of their liability coverage, most have not taken action concerning one of their larger assets, mainly the value of their Professional Association (PA). This can be a significant problem, especially in group practices.  Why is the P.A. a problem? It's a virtual certainty that when a physician is sued, their PA will also be named in the suit. The PA is normally liable for the malpractice of any of its' employees. Several insurance companies have stopped writing separate policies for PA coverage, and instead are requiring doctors to increase their individual coverage.  Let's take an example of a four-partner group practice, with total receivables and equipment of $800,000, or about $200,000 per partner. The major problem with the PA assets is that the entire value of the PA is at risk. If one of the doctors were to have a judgment of $1 million, and their personal assets were protected, the PA would be responsible for the judgment. Consequently, the other three doctors, who were not named in the suit, could lose their entire equity in the PA.  How do you protect the P.A.? The best method is to borrow money from a bank using the receivables and equipment as collateral for a loan. The bank then becomes a secured creditor. This becomes important if there is ever a malpractice judgment against the PA.   A secured creditor such as the bank always gets paid prior to an unsecured creditor such as a malpractice claimant. In our example, this group would borrow $800,000 from a bank. Therefore, the net assets of the PA after the loan is in place would be zero, removing the practice as an easily attachable asset.   "Protecting your P.A. reduces the attractiveness of this asset to a plaintiff's attorney." Once the money has been borrowed, it must be distributed from the PA to the individual physicians to become part of their personal asset protection program. There are two ways to accomplish this: 1) Distribute the loan proceeds ($200,000 per doctor) as wages to the individual doctor. Wages are considered a protected asset class. These funds can then be used to invest in protected assets such as homestead, annuities, or spousal transfers. This method has the advantage of being very clean and simple, but the disadvantage of being subject to 40% income taxation.   2) Utilize the funds to buy a life insurance policy or annuity investment within the PA. Then distribute the contract to each physician under what is known as a deferred compensation plan.  This plan has the advantage of deferring taxes on the distribution. It is important to do proper research into the annuity or insurance investments for this plan. No-load or very low load investments are recommended as being the most cost effective. Due to the complex tax implications, this method requires a competent tax attorney to draft the proper documents. In either plan, if the loan proceeds are invested properly, the returns should hopefully match or exceed the cost of interest on the loans, thus making this a reasonably inexpensive method of protecting the PA. Ideally, this strategy should be implemented well in advance of any lawsuits being filed to avoid any problems of fraudulent conveyance. As the malpractice crisis worsens, this would reduce the attractiveness of such assets to a plaintiff's attorney. Reprinted from Florida Medical Business Singer Xenos does not provide legal advice. Please consult with your own legal counsel.