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Estate Planning & Asset Protection For Physicians

By: Irving O. Farber, Esq.The asset protection planning legal scholar, Duncan E. Osborne reminds us that, in the absence of a nefarious reason, asset protection planning is a right. He has written that:“Almost all estate planning lawyers, almost all of the time, represent honorable , law abiding clients, men and women who daily contribute to society by their productivity and with their generosity, who pay their bills and their taxes, and who are not deadbeats, cheats, frauds, or criminals.  These same good people, some of whom have acquired significant wealth by their own hard work or that of their forebears, are legitimately concerned about the success of an American litigation system which sometimes more resembles a lottery-like payoff game than it does a reliable forum for the settlement of genuine claims.  These clients of integrity, the persons who make up the vast majority of the clients with whom ethical attorneys deal every day, are both willing and eager to plan and act within the time-honored and well established rules of estate planning and asset protection planning.  Such clients have the right to conduct estate and asset protection planning, and, as some have argued, we attorneys have a duty to assist them in this endeavor.”He punctuates his point with an irony that physicians in particular can sympathize   with:“The next wave of creative malpractice actions could well be against estate planning attorneys who fail to advise clients about asset protection alternatives, filed by clients who have suffered financial reverses which could have been avoided with such planning.  The estate planner’s defense would be, of course, that ‘I do not do asset protection planning.  I was engaged for estate planning purposes.’  And any semi-competent plaintiff’s lawyer would have a field day with that response.  Make no mistake about it --- estate planning is about asset protection.  Indeed, what are we estate planners about if not the preservation of wealth? Is the tax collector’s grasp the only one we are charged to avoid by all legitimate means for our clients?  The creditor’s lawyer and the divorce lawyer can be every bit as much a predator as a tax collector.  To ignore legitimate asset protection planning alternatives (including the asset protection trust) is to court disaster for both your client and yourself.” (Emphasis Added)The asset protection methods available to physicians, particularly if you have amassed significant wealth you wish to preserve for yourself and your family in a tax advantageous manner, involves tax planning, estate planning, and consideration of multiple techniques, such as Domestic Asset Protection Trusts (DAPTs) and Offshore Asset Protection Trusts (OAPTs).  To do tax planning properly and legally, it must be done within the rules set forth in the tax code and tax regulations.  And, it must avoid any suggestion of intent to defraud any known creditors, or even potential ones.  This means that, if properly carried out, your estate/ asset protection plan begins with a solvency analysis, that is, all assets must be reduced by, among other things, the subtraction of all debts, liabilities, claims, contingent liabilities, pending lawsuits, and potential claims.  At the end of this solvency analysis, you are in effect, providing for the protection, not just of yourself, but for potential creditors.  Thus, you are engaging in prudent and careful asset protection, for yourself, but limiting the pitfalls of potential legal challenges.  To achieve this end requires the expertise of experts to properly guide you, including attorneys, accountants, financial advisors, and insurance underwriters.No checklist of available methods of estate planning and asset protection are as instructive as a real case history involving a Westchester County physician in a reported case from the Supreme Court of Westchester County decided in 1998, the divorce case of Riechers v. Riechers ( New York Law Journal July, 1998).  The case has been cited for the proposition which recognizes the validity of an Offshore Asset Protection Trust.  But merely referencing the case for that proposition does little to educate the physician considering various protective trusts so hereafter, in relevant part is how the decision reads:“Plaintiff, Mary Riechers (“wife”), was married to the defendant, Roger Riechers (“husband”), on July 9, 1996.There are two emancipated children of this marriage, Matthew Riechers (born August 26, 1970) and Christopher Riechers (born July 4, 1975).At the time of their marriage, plaintiff was a licensed registered nurse at St. Vincent’s Hospital and the defendant was a second year medical student at New York University Medical School.  Prior to the marriage, the defendant had earned a Bachelor’s of Arts Degree at Columbia University in 1964.  The defendant received his medical degree in 1968 and obtained his license to practice medicine in 1969.The parties entered the marriage without appreciable assets.The wife’s earnings constituted the base support of the family while the husband attended school and began his residency at Mount Sinai Hospital.  Plaintiff continued to work after her first born and contributed to the financial stability of the parties through the 1970’s.Upon completion of his residency requirements, the parties moved to White Plains where defendant began his career as an associate urologist employed by a White Plains practitioner.In 1975, defendant moved on to open his own practice in Yorktown Heights and the parties purchased their first home in Chappaqua.  In these early days of the defendant’s practice, the plaintiff often worked with her husband at his practice and performed duties from receptionist to Registered Nurse.During this entire period of time, the plaintiff/ wife worked closely with her husband and was very supportive of his career decisions, and the defendant consulted with her each step along the way.The parties differ sharply on the social and community involvement efforts of the wife towards the success of the defendant’s medical practice, but it is clear that the parties worked as a team to support, promote, and develop the medical practice of the defendant throughout the marriage.EQUITABLE DISTRIBUTIONConsidering the age and health of the parties, the duration of the marriage, the parties’ respective contributions to their marriage, income and assets of the parties entering the marriage, the fact that plaintiff will no longer be a legatee under defendant’s last will and testament and may no longer be entitled to any distribution from the Riechers Family Trust, and in reviewing the credible evidence, and considering the legislative factors enumerated in Domestic Relations Law § 236 Part B § 5(d), this Court determines that the economic and social partnership of this thirty-one year marriage requires equal distribution of all marital assets. (See Damaino v. Damaino (1983), 94 A.D.2d 132 at pages 138-39, 463 N.Y.S.2d 477).Marital assets constitute all property acquired by either spouse during the marriage and before commencement of this action irrespective of title (Sorrell v. Sorrell (1996), 233 A.D.2d 387, 650 N.Y.S.2d 237) except as otherwise provided by agreement or excluded as separate property pursuant to Domestic Relations Law § 236B(5)(b).RIECHERS FAMILY TRUSTIn September 1992, the defendant, Roger M. Riechers, as general partner, formed the Riechers Family Partnership Limited, a limited partnership formed under the laws of the State of Colorado.  At the same time the defendant, as settlor, established an irrevocable trust in the Cook Islands under Cook Islands Law (see, International Trust Act of 1984).  Further, the Riechers Family Trust was funded with 99% of the assets of the Colorado limited partnership.  The remaining 1% of the Colorado limited partnership is owned by Dr. Riechers.  The trust portfolio was valued at approximately $4,000,000 as of December 1994.The Trust beneficiaries are plaintiff, defendant, and their children.  However, the plaintiff is not personally named as beneficiary.  Rather, the trust instrument designates plaintiff in a separate category as “Spouse of Settlor”, the designation and the benefits thereof, plaintiff would lose on entry of a judgement of divorce.The plaintiff maintains that all assets used to fund the limited partnership and trust were marital assets; that the trust is not irrevocable; that plaintiff did not give an informed consent to the establishment of the Trust or the transfer of marital assets to the Trust; and that plaintiff is entitled to a sum of money representing the plaintiff’s equitable distribution from the corpus of the Trust.In separate litigation, prior to the commencement of this trial, plaintiff began an action in the High Court of Cook Islands (October 1997) naming Dr. Riechers and the trustees of the Riechers Family Trust (Southpac Trust International Inc. and Louis Meltzer) as co-defendants.  The Cook Islands court, by order dated October 23, 1997 issued a Mareva Injunction (Injunction tailored for recalcitrant defendants who would try to conceal or transfer assets to become judgment proof) ordering, in part, that the settlor and trustees “be restrained and an injunction be granted restraining them until trial or further order in the case *** from acting or omitting to act in a manner which may have the effect of *** (c) removing from the jurisdiction of this Court, disposing of, mortgaging, assigning, pledging, charging, or otherwise dealing with any of the assets purportedly disposed of or transferred to the Trust within the jurisdiction (in particular but no[t] limited to the property referred to in the affidavit of the plaintiff filed herewith)***(g) removing or substituting any beneficiary of the Trust.”It is important to review the facts and circumstances leading up to the formation of the Colorado limited partnership and the Riechers Family Trust.  Dr. Riechers maintains that as a result of the three (3) separate malpractice lawsuits filed against him between 1984 and 1988, he began to consider asset protection planning to preserve the family assets.  While the plaintiff confirms that Dr. Riechers denies that she was very concerned about the subject malpractice litigation, Mrs. Riechers denies that she was ever consulted by the defendant in the planning or formation of the Riechers Family Partnership.  Further, plaintiff maintains that she only became aware of the Riechers Family Trust after this action for divorce was commenced.It cannot be said with any degree of certainty that the formation of the limited partnership and the Riechers Family Trust was an attempt by Dr. Riechers to avoid the consequences of equitable distribution of marital assets in contemplation of divorce by secreting martial assets (Contino v. Contino (1988), 140 A.D.2d 662, 529 N.Y.S.2d 14) or by deliberate dissipation of marital assets (Goldberg v. Goldberg (1991), 172 A.D.2d 316, 568 N.Y.S.2d 394).Assuming, arguendo, that this Court had jurisdiction over the corpus of the Riechers Family Trust, which it does not, a cause of action would not lie to set aside the trust since the trust was established for the legitimate purpose of protecting family assets for the benefit of the Riechers family members (Ciaffone v. Ciaffone (1996), 228 A.D.2d 949, 645 N.Y.S.2d 549).Nevertheless, it is clear and unequivocal, that the limited partnership and the Riechers Family Trust were funded with marital assets with the exception of minimal funds attributable to moneys received by the defendant from his mother offset by defendants 1% retention in the Colorado Limited Partnership.  The value of the Riechers Family Trust (November 1997) is $5,563,154 . . . .The question remains, therefore, whether in absence of a finding of economic fault, as determined in the case at bar, the value of marital assets placed in an irrevocable trust is subject to equitable distribution? The answer is in the affirmative.In the case at bar, this Court has no jurisdiction over the defendant.  See, Alan D. Scheinkman, New York Law of Domestic Relations, Section 14.15, Page 434:‘Marital property is marital property, irrespective of its location.  If the court has personal jurisdiction over its parties, it may adjudicate as to property located out of state (see Miller v. Miller, 109 Misc.2d 982, 441 N.Y.S.2d 339 (Sup. Ct., Suffolk County, 1981)).  Thus, whatever property the parties have, wherever in the world located, it may be subject to equitable distribution upon divorce.’Upon the divorce of the parties, which has been granted herein, the plaintiff/ wife will no longer be a beneficiary of the Riechers Family Trust notwithstanding the Mareva Injunction granted by the High Court of Cook Islands.  While the ultimate determination of the entitlement to the corpus of the Trust remains with the High Court of Cook Islands, this Court awards to the plaintiff one-half of the value of the marital assets placed in the Cook Islands Trust by the defendant as of December 1994, to wit: $2,000,000.  This award shall not be duplicative of any award that may be made to the plaintiff by the High Court of Cook Islands, and no stay shall issue thereon.  Further, this Court is not unmindful of the passive appreciation of the assets placed in the Riechers Family Trust for which no award has been made to the plaintiff.  In the absence of a finding of economic fault, as determined by this Court, that issue is properly before the High Court of Cook Islands.[Portions of opinion omitted for purposes of publication.]KENNETH W. RUDOLPH, Justice.”Conservative, estate and asset protection planning, containing a defensible  creditor protection plan, including a spousal protection plan, will pass legal muster, and will make it difficult to successfully challenge the plan as involving fraudulent transfers of assets.  There are multiple legitimate methods and legal techniques available to financially successful physicians (the referenced trusts, pre-nuptial contracts, etc.) and there is every reason and right to protect your dedication and hard work.  By resorting to the best coterie of experts available to you, including lawyers, accountants, financial consultants, and insurance underwriters, you are recognizing that, as in medicine, you want to consult with specialists.  After all, you earned your money, so do not be penny wise and foolish – spend some small part of it to secure your future and that of your loved ones. 

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