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Monthly Archives: September 2015

Financial Planning for Physicians

Building a Wealth Plan

Most physicians’ lost wealth potential is not caused primarily by poor investment choices. Rather, it is a lack of coordination across all areas of their financial lives that cause most doctors to give up their greatest potential. There are nine important planning areas that every doctor must address in order to build and implement a properly balanced and coordinated wealth plan.

Areas to Address in a Coordinated Wealth Plan

  1. Cash Flow
  2. Risk Management
  3. Debt
  4. Retirement
  5. Education
  6. Tax Planning
  7. Practice Management
  8. Estate Planning
  9. Asset Protection

A good financial advisor specializes in working with your other professional advisors to put each of these pieces together into one comprehensive and well-managed plan. Physicians often demonstrate that this coordination can literally mean the difference between hundreds of thousands–to millions–of dollars of additional wealth over their lifetimes.

Take for example many clients who have a large balance in their 401(k) or 403(b) plan through their practice. It astounds us that many of these investors have no idea that along with their account balance, their tax burden is also compounding throughout their working years. Without coordinating their future tax situation with their investment decisions today, they could face disaster when they reach their retirement years. We liken this financial coordination to a big jigsaw puzzle. If you correctly place all of the pieces, you can usually get a great outcome, but if just one piece of the puzzle is missing, everything else will get distorted.

In Summary

Our goal is to help you realize that you can go in one of two directions with your family’s financial future.

You can devote a significant amount of your time on a regular basis to stay abreast of financial issues and continue to manage your family’s financial playbook on your own. If you follow this path, do so with extreme caution. Physicians face a “crisis of overconfidence” as it relates to their own financial abilities. Consistent studies document that the more confidence a physician has in his or her own financial expertise, the less likely he or she is to actually be correct in this assessment. (5) (6)

Alternatively, you can delegate this work to a specialized professional so that you can spend your time following your passions, rather than worrying about how to finance them. At the end of the day, our hope is that every physician is being properly served when it comes to his or her financial life–either through his or her own efforts, or through those of an advisor or team of advisors. We want your financial life to be an area of peace for your family, not a source of stress. That outcome will only occur when your financial decisions are properly aligned with the core values you share for your family and when each piece of your financial life is working together in harmony with all of the other pieces.

Have Questions?

5) Unskilled and Unaware of It: How Difficulties in Recognizing One’s Own Incompetence Lead to Inflated Self-Assessments. Dunning, David and Justin, Kruger. Washington, D.C. : American Psychological Association, 1999, Vol. 77. 6) Montier, James. The Folly of Forecasting: Ignore All Economists, Strategists, and Analysts. London, England : DrKW Macro Research, 2005.

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide legal or tax advice or services. Please consult the appropriate professional regarding your legal or tax planning needs.

Doctor Asset Protection

Protect Your Assets With a ‘Family Bank’

One of the biggest drains on your account may not be the market but rather family requests for money that may never be repaid. Preserve assets—and emotional health—by setting up a “family bank” where loan requests are reviewed, approved of, and monitored.

Left with a sizable portfolio, Doctor Smith thinks her financial future is secure. Little does she realize that one of the biggest threats to her assets is not the markets and not her health, but her own loving children, who think she has cash to spare. One by one, they quietly approach her for loans that will never be repaid. The guilt she feels from turning them down is worse than the fear created by the draining of her assets, but what’s a mother to do?

One possible solution in this familiar—and for most people, it is familiar— scenario might be for Doctor Smith to informally set aside a reasonable portion of her portfolio in a separate account and consider it the family bank. Although the amount she uses to seed this account will depend on her financial situation, she should remain cautious regardless. This account will always be registered in her name, just as her portfolio is now, but the expectation will be that these funds will be available to help her family from time to time. Her children may request a loan from the family bank at any time, using a more formalized process; a bit different than hitting up mom for cash while she’s cradling her first grandson in her arms. By adopting a few basic ground rules, you can forestall years of emotionally taxing personal and family stress.

Written loan request

Anyone desiring to borrow money from the family bank must draft a written request for the loan. The request should identify the following items:

  • The amount of the loan requested.
  • The repayment schedule desired. Hopefully, this will be expressed as a specific amount over a fixed period of time. In some cases this might be a bit more vague, such as, “I’ll repay it as soon as my house/boat/car is sold,” or “Once I get a new job, I’ll begin to make payments.”
  • The intended purpose for the loan proceeds. This needs to specify what the money will be used for (debts, education, acquiring a house or car, etc.).
  • A summary of any other outstanding loans from the family bank. This should include any existing loans made directly by Mom before the family bank was established. In fact, it is a good idea to address any existing loans to family members, whether current or in default.

Tough love

It can be emotionally difficult to request a signed promissory note from a family member, especially a child. It may be even harder to enforce such a note if the child defaults. The signed promissory note creates a needed formality, with the expectation for repayment that often does not exist with family loans. Another asset protection strategy may be to request that if the borrower is married, the spouse must sign the note as well. It is amazing how this stipulation can cut down on frivolous requests.

Don’t be afraid to ask for help

Make sure you keep an open line of communication with your financial advisor. As in most financial relationships, the benefits of transparency and accountability should never be underestimated. While you should feel comfortable making decisions as the director of your own family bank, there is real value to keeping your financial advisor well in the loop. If you choose to do so, you can even appoint your financial advisor as chief executive, while still retaining full veto power. By handing over the burden of loan approval to your financial advisor, you can keep emotional and transactional relationships with each child exclusive, while still creating a mechanism to help out. If the directors approve any loan that you don’t care to make, you have the choice not to distribute the funds from your account.

In many cases, the children will simply choose not to request a loan from the family bank when it involves this level of disclosure. And in the case of younger members who have not yet been able to establish a credit rating, or a sister just emerging from a divorce, access to funds via the family bank may be a tremendous advantage for getting on sound financial footing. After all, isn’t this what families are for?

Fairness is key

As a doctor, there is usually no real fear that the money might run out; rather, the issue is one of maintaining a sense of fairness for those members who would be eligible to request a loan. Another benefit is that the family bank as a practice offers valuable lessons to children of all ages.

The family bank essentially puts the pressure appropriately on the borrower and removes you from the process of approving or monitoring the status of a family loan. It also forces a level of accountability among siblings or other family members that might be uncomfortable for you alone. This accountability often leads to a more professional level of interaction among siblings. Coupled with the fact that you retain full control over your accounts at all times and have the right to ignore any recommendation for making a loan, a family bank could be a real win-win for you and your family.

Copyright © 2012 by Horsesmouth, LLC. All Rights Reserved.

Have Questions?

Advisory services offered through Larson Financial Group, LLC, a Registered Investment Advisor.
Securities offered through Larson Financial Securities, LLC, member FINRA/SIPC.
Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide legal or tax advice or services.  Please consult the appropriate professional regarding your legal or tax planning needs.
The views and opinions expressed in this article are those of the author, are for educational purposes only and do not necessarily reflect the official policy or position of Larson Financial Group, LLC or any of its affiliates.

Tax Strategies for Doctors

Physician Tax Deductions

Tax planning is all about using proven and effective methods to pay as little in taxes as possible. A good tax strategy will reduce your tax burden in three primary ways:

  1. Reduce your taxable income
  2. Reduce your actual taxes owed
  3. Delay the due date on your taxes for many years to come

Reducing Taxable Income

Tax deductions are the means of reducing taxable income as much as possible. Most tax payers are familiar with the idea of deducting the interest they pay on their mortgage from their taxable income. The effect is that there is less income to be taxed. The same holds true for practice owners who are able to expense their business purchases prior to calculating their taxable yearly profit. The number of opportunities tax payers miss when it comes to tax deductions is hard to quantify. Physicians overpay their taxes consistently by not taking full advantage of the tax deductions available.

Personal Tax Deductions Include:

  • The value of items or funds given to charity (also considered a business deduction).
  • Any interest paid on a first mortgage for your home, and a second home for up to $1 million of loans.
  • Interest paid on second mortgages or home equity loans for your home, and a second home for up to $100,000 of loans.
  • Interest paid on student loans if your income is within allowable limits.
  • Funds contributed to a tax-deferred retirement plan (also considered a business deduction).
  • Professional fees that exceed 2% of your adjusted gross income, including legal, accounting, investment, and financial planning fees.
  • Investment losses.
  • Travel expenses in connection with a job search.
  • Expenses for using your automobile for charitable purposes.
  • Continuing education expenses.
  • Medical expenses, including health insurance premiums, which may or may not have income limits, depending on how the plan is structured.
  • Pre-school or childcare expenses paid for your children so that both spouses can work.

Note: The preceding list of available tax deductions is only a partial representation. It is not comprehensive and varies from person to person. Please consult a tax professional with knowledge about your specific needs.

Charitable Gifts

Even though numerous tax strategies exist, a favorite tax strategy is applicable to anyone that gives cash to charity each year, and also has a significant taxable investment account. In this case, a physician can gift investments to a charity instead of cash. They can repurchase similar investments with their cash, and will owe less tax when the investment is ultimately sold. This strategy creates a triple tax benefit:

  1. You receive a deduction for the full amount of the investments that you gift to the charity.
  2. The charity can sell the investments tax-free, even if there is a substantial gain.
  3. You pay less tax when you ultimately withdraw your cash that has been reinvested.

Tax Deductions for Doctors

In addition to tax deductions, available tax credits can actually reduce your tax bill, dollar for dollar.

Tax Deductions for Doctors

Items potentially eligible for tax credits include expenses for:

  • Higher education
  • International or domestic adoptions
  • Energy-efficient home improvements
  • Each child that you have
  • Childcare so that you and your spouse can work

Though tax credits are the most desirable tax benefit, they are often excluded for families with high incomes. Therefore, most of our clients find that they are limited only to tax deductions for planning purposes because their incomes are too high to be eligible for any credits.

Delaying the Due Date

When tax deductions or credits are not available, a third tax planning strategy is to delay the due date on taxes owed for as long as possible. One respected CPA told us that from day one, a CPA is taught how to keep delaying or deferring taxes. Though this is sometimes appropriate, in many instances it would likely be better to reduce the taxes owed rather than just delay them. Additionally, with high-income professionals, they may actually be delaying their taxes to an even-higher bracket later on.

The problem with delaying taxes is that it usually comes with a cost. Few people understand the negative ramifications of delaying taxes. Take for example the 401(k) that delays taxes until later. Not only do you eventually owe the taxes, but you also owe taxes on the growth in your account.

Due to the compound taxation often caused from tax-delay strategies, it is usually better to first seek out true tax-deduction strategies. The main exception to this rule comes with major real estate investment. If someone has a large gain on an investment property, under certain guidelines they can do what is known as a 1031 exchange, delaying the taxes owed on the sale of the property by purchasing another property. Many physicians use this technique on their investment property to delay their taxes as long as possible. Provided that they delay the taxes until death, the taxes may be forgiven without ever having been paid.

Physicians often pay unnecessary taxes to the IRS. A well balanced financial plan will help you implement strategies that reduce your tax burden. Larson Financial Group advisors are experts at creating balanced financial plans that can significantly reduce your tax burden.

Have Questions?

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide tax advice or services. Please consult the appropriate professional regarding your tax planning needs.

Physician Retirement Planning

Using Life & Health Expectancy Scenarios

Financial planning for physicians shouldn’t stop at retirement. It’s unpleasant, but necessary to imagine what your situation might look like after the death or incapacitation of a partner. An early dose of reality can help you build a financial foundation in case you survive your spouse.

 

Why it’s necessary to imagine possible scenarios

Scenario planning is fun when you’re planning vacations, but not so enjoyable when it involves contemplating life’s worst events. Attempting to imagine the death of a long-term partner and then organizing the financial (and emotional) resources to carry on for up to 25 more years seems like too brutal an exercise to put yourself through. But if thinking about it for a minute would help you prepare for such an eventuality, the pain of imagining worst-case scenarios can be replaced by relief that the necessary insurance policies and investment plans are in place to preserve your financial security and protect your assets, should that scenario play out.

To keep financial planning realistic, and practically, rather than emotionally oriented as you lay the groundwork, make sure to keep projections within the context of your overall life plan. What do you see for yourself in the years ahead? How do you want your life to play out? What do you want to accomplish? How do you want to live? Then… what if something goes wrong? Can you imagine yourself getting old? Can you imagine yourself acquiring a debilitating disease? Can you imagine yourself becoming widowed? Can you imagine yourself dying?

The current trend in retirement planning is to focus on the positive. It’s exciting to dream of all the trips and leisure activities that await in retirement while putting an investment portfolio in place to fund that eagerly anticipated lifestyle. Naturally, nobody wants to think about how those dreams might be shattered by illness or an untimely death.

But this type of worst case financial planning is exactly where financial advisors can help doctors the most. By helping guide your mind to those darker places, a well-informed, trusted financial advisor can make it easier to contemplate scenarios you may never consider on your own. Then, working together, you can develop solutions that recast those scenarios in a less terrible light.

Have Questions?

Copyright © 2012 by Horsesmouth, LLC. All Rights Reserved.

Beat a Lawsuit Before It Begins

Asset Protection for PhysiciansWhile estate planning focuses on preventing many different wealth-eroding factors (taxes, prodigal spenders, poor trust structure, divorce, and others), for this article’s purpose, asset protection is specific to wealth erosion caused by a liability claim or bankruptcy.

With the advent of Internet research, asset protection has become a major concern for physicians. Today it is possible that for less than $1,000, others can easily uncover the following information about you: (68)

  • Your annual income and the income of your spouse
  • Your assets
  • Your social security number
  • The balance in your accounts
  • The location of your accounts, including account numbers and safe deposit boxes
  • The investment positions you own, and the trades you have placed in your accounts
  • The equity in your home
  • Your mother’s maiden name

Based on the above information, a plaintiff’s attorney can quickly tell if you are a good candidate to be a defendant in his lawsuit. If you have deep pockets, great income, and a lot of assets, it is far more likely you will find yourself on the wrong end of a lawsuit. On the other hand, if a little research uncovers that you only own a home with little equity and few other assets in your name, you are much more likely to avoid the unpleasantness and expense of a lawsuit. We are frequently asked about asset protection in specific relationship to medical malpractice insurance issues. As a result, we have compiled the following data to show the trends and breakdown of near-term malpractice claims history by state. (61)

Unfortunately, some physicians erroneously consider the need for asset protection only in the context of medical malpractice. Although malpractice claims are a legitimate concern in several high-risk states, our experience is that malpractice should not be the sole focus or main concern. Anecdotally, we have witnessed several physicians sued for frivolous malpractice issues, but we have yet to personally see one lose a dime of their own money to a malpractice claim. However, we have seen several examples where physicians had their personal assets successfully attacked as a result of a claim outside of their medical practice.

We became even more passionate about this issue after a good friend of one of our advisors lost his multimillion-dollar nest egg due to a frivolous injury lawsuit caused by someone else. He was the only one with deep pockets in the vicinity of the event, so the attorneys went after him–and won. This entire family was hit hard emotionally, and his net worth was decimated from $8 million to $350,000. This cemented our opinion that this is an important area of comprehensive wealth management that doctors and dentists simply cannot afford to ignore. (62)

When it comes to asset protection, timing is everything. In fact there are only two time frames: before and after a hint of trouble. Carefully constructed asset protection strategies that are fully implemented before any hint of trouble are much more likely to succeed, and can save you hundreds of thousands, or even millions, of dollars. By “hint of trouble,” we mean before an event occurs that could trigger a lawsuit, or long before it appears that your creditors may push you into bankruptcy. Unfortunately, the same is not true for asset protection strategies initiated after a hint of trouble. Moving assets to avoid existing plaintiffs or creditors could cause major problems, and leave you subject to a claim of fraudulent conveyance. This could cause you to automatically lose your suit; in the worst-case scenario, you could go to jail. This is the key message: the sooner you get started, the more likely you will be able to protect you and your family from losing your assets to litigation.

Larson Financial Group believes the best strategy for physicians who want to protect their assets is to take a two-pronged approach:

Step One:

Avoid situations that put you at risk. In other words, avoid lawsuits in the first place. This could mean avoiding dangerous situations and minimizing risk.

Step Two:

Make it so difficult for plaintiffs to sue you and recover that they don’t bother to go after you in the first place, even if an event does occur. The result: Your assets and your business are protected and prevented from claims if you are sued. In other words, with a carefully drafted plan, your plaintiffs will not have an economic incentive to sue you.

It is estimated that over 19 million lawsuits will be filed in the U.S. this year. (68) The focus of asset-protection planning is to establish appropriate measures ahead of time so that when a lawsuit comes your way, you are already prepared to defend yourself. Many different strategies exist to attempt to protect assets, but the finest are those that do so aboveboard, without trying to hide anything.

We are amazed by some of the verdicts that have been handed out by juries and judges in our own communities, and even more amazed by some of the judgments handed out around the country. Randy Cassingham gives out The True Stella Awards® (64) each year for the most wild, outrageous, or ridiculous lawsuits. He states in his book, The True Stella Awards, (69) “Other times, people view doctors and hospitals more as deep pockets full of money than as partners in responsible health care.”

Ridiculous cases demonstrate that asset protection is important for any physician with substantial assets or income. Asset protection attorney Robert Mintz warns, “Every day in court a sympathetic plaintiff prevails against a wealthy or comparatively wealthy defendant–even in those cases which appear to be absurd, illogical, and utterly without merit.” (68)

You have worked way too hard to see your efforts go up in smoke because they were not properly protected. The biggest problem with asset protection: It is an ever-evolving discipline. Once a strategy is used frequently, an attorney somewhere finds a way to beat it. What works, and does not work, is also different on a state-by-state basis, as every state has different laws to circumvent. To ensure your assets are as safe as possible, it is important to work with an expert attorney who specializes in asset protection to make sure that your plan is up to date with the most recent case law.

Are your assets properly protected?

(61) 2007 Medical Malpractice Crisis States, as determined by the American Medical Association, cross-referenced with information from the 2007 Kaiser Family Foundation analysis of data from the National Practitioner Data Bank (NPDB). States are listed in order of highest average claims first. For further information on the current state of medical reforms: http://www.ama-assn.org/resources/doc/arc/mlr-now.pdf (62) Particulars are altered to protect the friend’s privacy but the story is still very much on point with what happened. (64) Stella Awards® is a registered trademark of This is True, Inc. (68) Mintz, Esq., Robert J. Asset Protection for Physicians and High-Risk Business Owners. Fallbrook, CA: Francis O’Brien & Sons Publishing Company, Inc., 2007. (69) Cassingham, Randy. The True Stella Awards: Honoring Real Cases of Greedy Opportunists, Frivolous Lawsuits, and the Law Run Amok. New York, NY: Penguin Group, 2006.

Larson Financial Group, LLC, Larson Financial Securities, LLC and their representatives do not provide legal services. Please consult the appropriate professional regarding your legal needs.