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Accounts Receivable Protection

One often-overlooked asset in a physician's office is Accounts Receivable.

This is not to put out a scare that “every physician will lose their Accounts Receivables; this is to say that it can be a valuable tool for Estate Planning and Asset Protection.  Accounts Receivable is an asset and depending on the size of the office can equate to a large dollar amount.  Accounts Receivable is a viable attachment for creditors and litigators.  For this reason and for tax reduction, Accounts receivable (A/R) can work to your benefit if you are a physician.

There is more then one way to protect your A/R.  This is why an expert should be consulted, to find the way that benefits your office the most.  You have the ability to turn a non-cash and potentially non-income asset into a retirement tool.  However, a word of caution, do not jump on the first plan you are offered.  Conduct your due diligence because you have viable options if you are running a medical business.

One viable option is to use the A/R as collateral for a bank loan.  Depending on the lender, the loan will be valued by the revolving A/R account over a period of usually 60 – 120 days.  Depending, once again, on the lender, the value of the loan will be close to the A/R account document “what is billed.”  The bank will then have first lien against the A/R account and this protects the account from others including creditors and litigators.

The next step is to take the loan and put it into a safe option that offers Asset Protection for the physician.  It seems that every professional that deals with money, wants to tell physicians what to do with their money.  This is why opinions should be gathered not just from the “educated”, but also from the experienced.

Cash value life insurance can be ideal for meeting the requirements of the two priorities.  Individually owned insurance may fall under protected statutes that enhance the protection of the asset.  If your state does not protect a cash value life insurance policy, you should investigate other options such as using an LLC structure.

The bank making the loan will likely require a life insurance on the physician be assigned as secondary collateral.  This is in the event that they may require a liquid source of collateral.  The loan usually has a specific determination for termination.

Keep in mind that the receivables, once collected, will be taxable.  Therefore, it may be only the “net” after-tax amount of the receivables that are available to repay back the loan.  To the extent there is a deficit, the life insurance policy values can be used.

Once the loan is paid, the secondary collateral is released and so is the interest in the life insurance policy.  At this point, the physician is free to begin making potentially qualified income tax-free disbursements to his/her estate adding to the value of his/her retirement income.

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