By Roccy DeFrancesco
Have you been pitched an “asset protection” plan where you can protect the most valuable asset of your medical practice and build a tax-free retirement with the same plan? If you have, you’ve been pitched one of the most abused plans in the marketplace today (and if you have not been pitched this plan yet, you will be soon).
Doctors have been getting pitched this “asset protection” concept for years and due to an increase in activity by sales people hitting pushing the plan, I thought it was time to put out a cautionary article on it.
History of A/R Financing
This topic has been around for nearly 20-years in one form or another.
It is a favorite of some life insurance agents who love it because it helps them sell huge life insurance policies. Unfortunately, most of the time the purchasing doctors have no idea what they are getting into and many times the plans are sold in a non-full disclosure manner.
What is an A/R Financing Plan? It is a concept where a medical practice or company simply borrows money against their Account Receivables (A/R) and “invests” the borrowed money for retirement purposes (into cash value life insurance).
The “sales” pitch is two-fold: 1) The doctor needs to protect the medical practice’s A/R from creditors (patients); and, 2) the doctor can create a large retirement nest egg using a cash value life insurance policy funded with the borrowed money.
The financial viability of this plan is absolutely marginal and it is an extremely risky plan to implement. Additionally, the sales pitch is typically delivered (intentionally or not) in a non-full disclosure manner.
The Sales pitch (this illustrates why I do not like this concept)
Life agent: Doctor, did you ever think about the fact that your A/R is the largest asset of your medical practice and that it is an asset which is subject to the claims of creditors?
Doctor: No, I never thought about that before.
Life Agent: Also, did you ever think about the fact that your practice’s A/R is its largest asset that is just sitting around as a “stagnant asset” (meaning it is an asset that is not building you wealth).
Doctor: No, I never thought about that before.
Life agent: Doctor, would you like me to show you how to protect your A/R from creditors and show you how to create significant wealth for retirement at the same time?
Then the life insurance agent pulls out a life insurance illustration showing the physician how pouring $300,000 of borrowed fund (assuming the real A/R of the practice is $300k) into a cash value life insurance can generate enormous amounts of “tax-free” income in retirement. It sounds like a no lose proposition, asset protect a large vulnerable asset (the A/R) and create a large tax-free retirement nest egg.
This sales approach is total nonsense in my very informed opinion. Understand that I used to sue doctors for a living when I practiced law, I ran an orthopedic clinic for three years, and I’m licensed to sell malpractice insurance to doctors (not to mention that I wrote a book called The Doctor’s Wealth Preservation Guide where I show doctors how to do “real-world” asset protection).
To be brief, here are just a few of the problems with this sales approach:
1) The A/R is hardly at risk in a medical malpractice lawsuit. Ask around, have you ever heard of anyone actually losing their A/R in a medical malpractice suit? The answer will be no. There are multiple reasons why that I don’t have time to go into in this newsletter.
Think of this though, a doctor has personal medical malpractice liability coverage AND the medical practice has its own separate coverage with a separate policy and limits. The medical practice policy costs only 10-20% of what it costs the doctor for his/her policy. Why? Is it because insurance companies want to lose money? No, it’s because the practice has very little liability in your typical medical malpractice case (therefore, the practice’s assets are not typically at risk in a medical malpractice lawsuit).
To bring this into perspective, the A/R in a medical practice is more at risk to a sexual harassment lawsuit of an employee or a slip and fall of a patient than a medical malpractice lawsuit.
2) The doctor, may times, is told to write off the interest. This is footnoted in most sales presentations. It’s footnoted because most vendors who offer this concept will not “officially” tell a client the interest can be written off. Typically, this issue is left to the local CPA who has no idea that you really can’t write it off (see Title 26, 264(a) of the code). If you can’t write off the interest with this concept, it becomes much risky from a pure financial standpoint.
3) Much of the time the projections are not real-world. This concept is pitched to doctors of many ages, but it is most common to be sold to a 35-55 year old. The illustrations typically show a static loan interest rate based on “current rates.” As you know, interest rates currently are very low. Only 20 years ago commercial interest rates were north of 15%. But many illustrations given to clients show today’s interest rates projected out 20+ years (which is not realistic).
Further, the life insurance illustration is typically illustrated with an 8-9%+ rate of return (which is NOT a conservative illustration to say the least).
While I’m not going to go into specifics in this newsletter, I want to let you know that there have been lawsuits over this sales technique and a few high profile near misses. The Texas Medical Association looked at educating their doctor members on this topic until a huge lawsuit was threatened by one if its members who was involved with an A/R Financing plan.
What does that mean? It means that doctors are buying this concept because it sounds like a no lose proposition. Then 1-2 years into the deal, they figure out that it’s not what they thought it was and that they were sold the plan in a non-disclosure manner. Then they are suing the life insurance agent or other advisor who recommended it.
DO NOT believe all the hype with this topic. In the “real world” you’re A/R is hardly at risk in a medical malpractice lawsuit. When you run conservative illustrations about the interest expenses and the rate of return in the investment recommended, you’ll find that the plan is far too risky to implement for the potential benefits that can be provided in retirement.
If you want to bring a grow wealth in a tax-favorable manner, you should look at concepts like the Super 401(k) Plan or even a Captive Insurance Companies, which are time tested tools that you can rely on to grow your wealth.
If you would like a FREE asset protection CD, please e-mail email@example.com.
Roccy DeFrancesco, JD, CWPP, CAPP, MMB
Author: The Doctors Wealth Preservation Guide