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News Bulletin : ADA News Bulletin March 2011
33 MARCH 2011 business perspectives investment property in a trust and achieving some asset protection will cost the dentist $250,000 (reduction in net worth). Asset protection comes at a significant cost! Is the price worth paying? WHAT ARE THE 'EXTERNAL ASSET PROTECTION' RISKS? What is the risk of you being sued by a patient and suffering a personal loss -- either because your MDO doesn't pay out or the cost of settling that claim exceeds the MDO limit? Firstly, dental professional indemnity insurance provides very deep cover in that the limit on any single claim is very high -- often in the order of $10 to $20 million. There isn't any history in Australia of plaintiffs being awarded damages even close to this amount. Dentists also aren't subject to the same risk that other medical practitioners are (which reduces the risk of a very high claim). For example, a doctor that practises obstetrics is arguably exposed to much higher risks as problems can occur during the birth of a child that can have severe consequences -- probably why PI insurance premiums are five times higher than premiums for dentists. There are a few things in Australia that help limit the amount of medical liability legal actions. Firstly, the Statute of Limitations for medical liability claims is limited to two years (this was changed a few years ago are a result of Tort Reforms). Secondly, lawyers are not allowed to work on commission-basis in relation to medical liability actions, i.e., the fee cannot be a percentage of the damages. Generally, for a claim to fall outside of a professional indemnity policy, the dentist needs to have acted egregiously -- essentially with criminal negligence. For example, if you purposely harm a patient the insurer won't pay out -- of course! However, anything less than criminal negligence will generally be covered by professional indemnity. Again, these polices provide very robust and deep cover. A review of medical liability claims highlights that approximately only 3% of claims exceed $250,000. The average claim in 2008 was $80,000. Remember, this is for medical claims -- dental are likely to be lower. This evidence suggests that the maximum liability coverage referred to above is more than adequate. One major non-financial consideration is the emotional toll and reputational damage that a claim could bring. Whilst there might be a very high likelihood that you won't suffer financial loss, having all assets in your personal name might make you feel more stressed about the outcome of the litigation process (because you have more to lose). This consideration cannot be underestimated. A legal action can be protracted and time consuming. Whilst it's dangerous to make generalisations, based on the above factors it is reasonable to assess an average dentist's external asset protection risk as low. A WORD ON 'INTERNAL' ASSET PROTECTION Practically, the only effective way of protecting your assets from a relationship breakdown is through proactive measures (when the relationship begins) rather than retrospectively. The reason for this is that the Family Court has very wide sweeping powers and can look through most structures, e.g., trusts and make determinations that it feels are the fairest (much wider powers than a trustee in bankruptcy). They can unwind transactions that it feels were undertaken with the dominant reason of protecting assets from a separation agreement. The proactive steps you can take include the use of pre-nuptial and/or cohabitation agreements and using trusts that are independently managed. However, this is a complex area and advice should be sought at the outset of any relationship (should you seek protection). "Typically, a good solution for a dentist is to utilise a variety of structures to hold their wealth..." AND THE SOLUTION IS... Typically, a good solution for a dentist is to utilise a variety of structures to hold their wealth (assuming they don't operate a practice that is classified by the ATO as deriving business income as you can benefit from asset protection and tax efficiency). For example, we might recommend an investment property owned in the dentist's personal name with some gearing, direct shares or managed funds in a discretionary trusts and superannuation in a low-cost industry fund such as Health Super (or a SMSF where the dentist wants to invest in direct property). This diversification of ownership structures often helps balance out tax benefits. In addition, it also manages overall financial and compliance risk, cash flow, estate planning, retirement planning and so on. Of course, financial advice is never 'one size fits all' and I have made some broad sweeping generalisations. The purpose of this editorial is not to give you advice but to challenge the traditional way of thinking that: "dentists shouldn't own assets in their personal name because of asset protection". What I am suggesting is that perhaps the risk isn't as high as many might think and that maybe it is acceptable for a dentist to own some (not all) assets in their personal name. It's food for thought. Stuart Wemyss is a qualified chartered accountant, financial planner and mortgage broker. Stuart founded financial advisory firm ProSolution Private Clients which helps dentists maximise their net worth by providing financial and mortgage advice. ProSolution will be exhibiting at the Australian Dental Congress 2011. Contact: firstname.lastname@example.org
ADA News Bulletin February 2011
ADA News Bulletin April 2011