The Ethics of Asset Protection

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When I first started blogging at The White Coat Investor, I thought I’d be writing frequently about asset protection. It was one of the five or six main topics on the blog. Then I discovered the truth about asset protection what most doctors don’t know: it’s incredibly rare to lose personal assets in a malpractice lawsuit. Being a risk-taker by nature, I quit worrying all that much about it, especially when I realized the majority of my net worth at the time was in retirement accounts that had excellent asset protection from my potential creditors.

I’ve still written about asset protection from time to time on the blog, and I speak about it all the time because docs are so interested in it. It’s in the WCI Online Course, and there have been several podcasts dedicated to it. My keynote at WCICON in Las Vegas was entirely on asset protection. If you’re not up to speed on the basics of asset protection, start with these posts:

Today, however, we’re not going to talk about the nuts and bolts of asset protection. We’re going to talk about the ethics of asset protection.

“Ethics? What ethical considerations could there possibly be?” you say.

Well, you’re going to find out.

Asset Protection “Is Against the Law”

US law is monolithic, or unified, under the Supreme Court. The court does not like it when you try to use one law (such as LLC law) to get out of the results of another law (such as a law against negligence) or if you try to use the laws of one state against a judgment in another state. Yet this is inherently what asset protection law is all about. So, in this respect, asset protection is inherently against the law.

You Should Pay What You Owe

Most of us would agree that if we borrow money from a bank or our brother-in-law, we should pay the money back. So, why do we think that we should not pay someone that we owe money to as a result of the judgment of a legitimate court, at least once all appeal options have been exhausted? The court has determined that YOUR actions resulted in harm to someone else. Why are you trying to get out of paying them?

You don’t feel it is fair that you should lose everything for one mistake? Well, who gets to determine what is fair if not a dispassionate, professional court interpreting the laws passed by hundreds of government officials elected by hundreds of millions of your fellow citizens?

I Understand the Risk

Don’t get me wrong, I certainly understand the financial difficulties that a sudden seven-figure judgment can cause on your personal financial situation. These sorts of financial risks are the perfect candidates to be insured—and insured well—against. If I hurt someone, I certainly want to make them whole as best I can, and insurance helps me to do that. But when you start going beyond that, it’s time to start considering the ethics of not paying somebody the money that you owe them.

The laws of our country do provide significant protections against unlimited liability above and beyond the protection you would get from a reasonably sized liability insurance policy. For example, you can declare bankruptcy and wipe out the debts against you. In general, doing so also causes you to lose a lot of your assets, but both federal and state laws have exempted some of your assets from loss in those situations. For example, you generally get to keep your retirement accounts and, depending on the state, often get to keep a significant chunk of home equity, cash value life insurance, and annuities. These bankruptcy laws, of course, vary by state. Is that fair? Is it fair that a bankrupt Texan gets to keep his house while a bankrupt Utah doctors loses his for the same liability? Maybe not. But it’s quite an ethical dilemma, isn’t it?