Janet, a new physician client, was recently in my office looking worried.
“Adrian, I keep hearing other physicians at the hospital talk about protecting their money building up in their Prof Corps, and I’m starting to accumulate a fair amount myself. And now I’m getting a bit worried. Should I be looking to protect my money?”
“It’s a natural question to ask,” I told her.
“Especially when you’ve worked so hard to build up those savings. But before we start jumping into complex strategies, let’s take a step back and ask three fundamental questions: How big is the actual risk, how much money is actually exposed, and what can I do to protect it?”
“That makes sense,” she nodded.
3 Questions to Ask About Creditor Protection
1. How big is the actual risk?
“Adrian, isn’t the risk of getting sued pretty high in medicine?” Janet asked.
“The fear of it is high,” I replied, “but the actual risk to your personal corporate savings might be a lot lower than you think. First off, with the CMPA and malpractice insurance, that really helps for any of those types of claims. And you have access to a medical defence organization specifically designed to protect physicians and handle legal claims.
Malpractice claims are directed toward that defence structure, not targeted directly at your corporate bank account. So, step one is that we have to weigh the realistic probability of a claim ever hitting your corporate cash against the cost of trying to shield it.”
“That makes sense.” she said. “But I just can’t shake the concern that I might end up later thinking I should have done something to protect anyway.”
The goal with any planning is to allocate your income where it makes the most sense for you, once we create a strategy for debt repayment, lifestyle spending and risk management.
Then we can see what’s at risk from what’s left over, and tuck them away in a variety of ways to let them grow securely.”
2. How much money is actually exposed
“That brings me to step two,” I explained.
“Let’s look at what’s left in your Prof Corp after practice overhead, personal income you take out to live your lifestyle, and any other deductible expense. The money left over is called your retained earnings and you pay some corporate tax on that amount as well.
So the first step is to see what’s actually at risk each year. And if you’ve built up some RSP contribution room or paid yourself salary this year, we can move a chunk of those funds into your RSP. Not only does that lower your corporate tax footprint, but RSPs are also generally creditor proof by statute.
Not that we want ALL of your savings in your RSP, there’d be no point to incorporating if we just took everything out. But this is reducing what’s at risk.”
Janet nodded, then added,
“A friend at the hospital mentioned I should look into setting up a holding company – would that help?”
“In a few provinces like BC, yes, but not in Alberta unfortunately. The CPSA requires the shares to be held directly by the doctor,” I cautioned.
“Even loaning the money to a separate company still connects your Prof Corp, so that wouldn’t defeat a creditor, although you can create some neat income splitting with it down the road so there could be other reasons you might want to.”
Janet’s shoulders slumped a little.
I get it. Even though the risk is minimal, nobody wants to hear their savings could ever be at risk!
Thankfully, Janet has options.
3. What can I do to protect my savings?
“Is there anything I CAN do about creditor protection?” Janet asked me.
“Definitely! You have many options in step three,” I reassured her.
“In addition to RSPs? Having a home fully in a spouse’s name; segregated funds; or even some life insurance policies can be used to not only provide creditor protection, but they can grow your money tax-sheltered and be accessed tax-free for retirement.
The goal with any planning is to allocate your income where it makes the most sense for you, once we create a strategy for debt repayment, lifestyle spending and risk management.
Then we can see what’s at risk from what’s left over, and tuck them away in a variety of ways to let them grow securely.”
Janet scooted her chair in closer, leaned in with a smile and said, “Adrian, let’s get started!”
I’d love to hear from you! I’m always interested in hearing about the unique financial situations doctors have. Send me a note! And if you’d like to learn about my unusual 5 Bucket Formula for doctors? Please check out my newest Amazon bestselling book, Retire-ish: What Doctors Need To Know Before They (Sort Of) Retire
