Physician Asset Protection Plans: A Cautionary Look at CAPS
Many asset protection plans are marketed to physicians under the guise of offering financial security. Unfortunately, some of these plans actually place physicians in greater jeopardy. Careful scrutiny is essential. One such plan is the “CAPS” plan, approved by the Florida Medical Association, which is designed to protect a physician’s practice receivables (A/R).
How the CAPS Plan Works
- A bank lends money to the physician.
- The physician purchases an annuity with the loaned funds. (The annuity and its proceeds are exempt from creditors under Fla. Stat. §222.14.)
- Security for the loan includes:
- A lien on the annuity,
- A guarantee by the physician’s P.A., and
- A lien on the A/R to secure the guarantee.
In many cases, the loan documents stipulate that the bank must look first to the A/R in the event of default, theoretically preserving the annuity for the physician. Simple enough—but does it work? Answer: No. (Unless the creditor’s attorney is incompetent.)
The Legal Reality
Imagine a malpractice plaintiff obtains a judgment against both the physician and the practice, then asks the court to enforce payment through the practice’s A/R. Here are some key questions:
- Who decides? The same court that issued the judgment—already convinced the plaintiff is the victim and the defendants are “wearing black hats.”
- Do contractual technicalities matter?
Not usually. In proceedings supplementary, the court acts as a court of equity,
with broad authority to ensure fairness.
Is it fair for the bank to get paid in full, the physician to keep the annuity, and the victim to get nothing? Courts rarely think so.
Key Doctrines That Undermine CAPS
Several legal theories undermine CAPS and similar schemes:
- Equitable subrogation: When the P.A. pays the physician’s debt via seized A/R, it steps into the bank’s shoes with respect to the lien on the annuity. Creditors can then seize these rights.
- Marshaling of assets: If two creditors pursue the same A/R, but only one (the bank) has access to another asset (the annuity), the bank must first exhaust the annuity so both creditors can collect.
- Fraudulent transfer: The P.A.’s guaranty and lien on the A/R may constitute fraudulent transfers, as may the bank’s seizure of the A/R. Courts may infer actual intent to hinder creditors.
The Fraudulent Transfer Problem
Courts can infer fraudulent intent easily. Consider these questions:
Q: Were you aware that CAPS stands for “Comprehensive Asset Protection Solutions”?
Q: What does “asset protection” imply?
Q: Why borrow at a high rate to invest in a low-yield annuity, with nondeductible interest payments?
Q (to the bank): Why agree to look first to A/R when seizing the annuity would be easier?
If intent is established:
- Relief applies even to future, unknown creditors.
- The statute of limitations runs until the later of four years from transfer or one year after the creditor discovers it.
- Bankruptcy relief is unavailable if fraudulent transfers occurred within two years before filing.
Bottom Line
The CAPS structure often worsens a physician’s legal exposure rather than protecting assets. If the plaintiff’s attorney has even a basic understanding of asset protection law, this strategy unravels quickly.
Practical Advice
In today’s climate—where malpractice claims are common and insurance costs are high— asset protection planning is essential. However, physicians must exercise caution. Ensure that any plan you adopt genuinely benefits you and not merely your consultants or financial promoters.
