They say your home is your castle. Did you ever think there might be barbarians at your gate? With half of all medical malpractice lawsuit judgments over $1 million dollars, there is a real chance that a lawsuit judgment against you or your partners could actually threaten your personal assets. If you aren't lucky enough to live in one of the few states with excellent "homestead" protection, you are likely to be at risk of losing your home in the event of an outrageous judgment (and even homestead is now threatened as well).

To illustrate how this can happen, please consider this example:

Case Study: Victor the Victim of Bad Luck and Poor Planning
Victor is a physician who recently started a new practice as a general partnership with another doctor with whom he had worked and trained under some years ago. Victor and his wife have a home worth $350,000, with a $100,000 mortgage. Victor also has $100,000 in a SEP-IRA from his earlier practice and he has $150,000 in brokerage accounts. Victor's partner, whom we shall call Unlucky Lou, had the misfortune of a bad outcome. Initially the surviving family members were hurt, but not vindictive. After a few conversations with an attorney, their opinion changed and they sued Lou, along with the partnership and the anesthesiologist who was involved.

After a long 18 months of depositions and discovery, the case actually went to trial. The judgment was for $3,000,000. Lou's malpractice carrier paid the $1,000,000 coverage limit. The creditor then seized Lou's $400,000 brokerage account. Lou still had $2,000,000 in the profit sharing plan from his old practice. Aware of the federal protection of the plan assets, Lou then filed bankruptcy to rid himself of the creditor. He did lose what little equity he had in his home along with his brokerage account, but he was able to save his biggest assets, his profit sharing plan and his cash value insurance policies.

The creditor wasn't happy with the partial satisfaction of the judgment. They then sued the practice and its general partners (Lou) for the remainder. The attorney successfully took the practice accounts receivable ($400,000). Under the premise of joint and several liability with the general partnership, Lou still had to personally come up with the remainder. Victor's attorney could not protect him. Victor couldn't believe this. He asked his attorney if he could declare bankruptcy to save his assets. Victor unfortunately found out the hard way that his home, and brokerage accounts were all to be lost in this lawsuit. In actuality, they were all lost.

Victor hadn't even seen the client, but through the miracles of litigation and creativity of the suing attorney, Victor lost everything. What could he have done? There are advanced strategies to protect the Accounts Receivable of a practice, and brokerage

accounts. These are highlighted in our new special report or on our website www.jarvisandmandell.com. The focus of this article is to discuss how Lou and Victor could have protected their homes.

The following are all potential methods of shielding your home from lawsuits:

State Homestead Law
Every state has some type of homestead protection. In most states, as in New Jersey, New York, and Califorrnia, the level of protection is very low when compared to what real estate is worth. On the other hand in states like Florida and Texas, there is unlimited protection of the home's value. However, these state laws are now under the gun, as proposed bankruptcy legislation may limit how much homestead value can be protected in any state.

Tenancy by the Entirety
In states like Arizona (and others), you can file to have your home owned by Tenancy by the Entirety (T/E). Theoretically, this means that only a creditor who has a claim against both you and your spouse can take the home if it is titled this way. T/E is not automatic. You have to file to have your home titled this way. Also, there has been a case when a litigant successfully penetrated T/E and took a home from a couple because the couple had at least one joint creditor (it was a credit card with both of their names on it). Because of this case, we hesitate to consider T/E as a very strong protector ñ though we do admit it is much better than simple joint ownership. If you have over $300,000 in equity in your home and don't want to lose your home, you might want to consider additional planning to T/E.

LLCs and FLPs
Limited Liability Companies (LLCs) and Family Limited Partnerships (FLPs) are very powerful asset protection tools. In most cases, assets held by an LLC or FLP cannot be taken by a creditor. Rather, a creditor who has a judgment against someone's interest in an LLC/FLP can only get a "charging order" against that person's interest. What this means, very simply, is that the creditor has to wait until the doctor decides to pay him/her. This puts the doctor in a very strong negotiating position on any settlement. The attorney only gets paid when the settlement is paid. The attorney, and client, will generally settle for pennies on the dollar rather than wait 10, 20, or 50 years for the charging order to be fulfilled.

Drawbacks of LLCs and FLPs
Unlike other assets, the family home has unique tax attributes -- most notably, the deductibility of the mortgage interest and the $250,000/$500,000 capital gain exemption. By owning the home within an LLC or a FLP, these tax benefits may be lost, unless only one spouse owns 100% of the interests in the LLC or FLP. However, in a very recent case, the court set aside the protections of an LLC when only the debtor owned 100% of the interests in the LLC. For these reasons, we no longer recommend single-owner LLCs and FLPs to protect the family home.

Qualified Personal Residence Trusts (QPRTs)
When using a QPRT, you transfer ownership of the home to the QPRT irrevocably. While this is certainly effective for both asset protection and estate planning purposes, it comes with a significant cost ñ you no longer own your home. In fact, when the term of years is up (typically, 10 years), you have to pay rent to the trust just to live in the home. Also, homes with mortgages on them (most do) present further tax difficulties as well. For these reasons, while the QPRT is a strong asset protection tool, we typically do not advise using it for most clients, whose main concern is asset protection, not estate planning.

Debt Shields
The debt shield can be the most effective way to shield the equity of the home. Essentially, using a debt shield means getting a loan against most of the equity in your home. For many clients, this is counter-intuitive ñ they want to pay down the mortgage as much as possible. While this may have an emotional appeal, for asset protection purposes, it is the exact opposite of what you want to do.

To help people protect their home equity, one financial institution has designed an ideal "debt shield" programs for their clients. The bank loans the client the funds up to 90% of the value of the home and then files a mortgage (1st, 2nd or even 3rd) to "eat up" any available equity. Now the home is protected.

The loan funds are placed in an asset-protected trust ñ one drafted for the client by an asset protection attorney. Those funds are owned by the trust and, under the loan documents, required to be placed in the bank's CD account. Further, the bank contractually guarantees that its loan rate will be only 1% more than its CD rate ñ meaning that this structure will only cost you 1% of the home equity to implement (plus legal fees). When you retire or feel that the threat to the home has diminished, the CD account pays off the loan and the mortgage is released. This certainly has proven to be attractive to many looking to shield the home.

The Enhanced Debt Shield
In the basic debt shield above, there is a real cost to the loan versus the investment ñ a shortfall of 1% per year. What if the funds you gain by shielding your home could be invested in a way that you MAKE more than the loan interest? In this way, you would make money by shielding the home. Certainly, this is possible, in many states.

In some states, certain investment classes are asset-protected under state law. The most common? Annuities and cash value life insurance policies -- which are protected in states like New York, Florida, and Ohio, among many others. In states such as these, you could take a loan for 5% or 6% (tax-deductible partially or totally) and be able to invest in an annuity or insurance policy that credits 5% to 7% (tax-deferred). When you consider that the mortgage interest may be tax deductible, the true after-tax "cost" to you may be as little as 2.5% to 4%. If your asset protected investment returns approximately 6% (many life insurance policies have guaranteed minimum crediting rates of 3% or 4%)

and you are paying only 3% or 4% (after taxes) in interest, you can actually make money while protecting your castle.

Conclusion
There are many different strategies that may be employed to protect your precious assets (IRAs, real estate, insurance, investments, etc). For most physician families, there is no more important asset than the home. If you are concerned with protecting your home, you should speak to an asset protection specialist to make sure the barbarians at the gate of your family's castle can do nothing more than make a lot of noise and not disrupt your quality of life.