Austin, Texas Asset Protection Attorney • Protecting Accounts Receivable
Estate Planning Law Firm • Serving Lakeway and the Surrounding Austin, Texas Area
This article was prepared for the TMLT Reporter magazine. Please contact the author.
Most physicians never think about their Accounts Receivable (A/R) being an asset of their Corporation (Professional Association or P.A.) but that is exactly how it appears on the balance sheet and to plaintiffs' trial lawyers. As such, A/R are subject to the claims of creditors should the P.A. have a judgment filed against any of the physicians of the P.A. or against the P.A. itself.
What are A/R? A/R are established to account for fees that have been earned and due from services by the Physician but not yet paid to the P.A. or Physician. Since a large percentage of this account is so close to cash, it will be an attractive target for plaintiffs' attorneys, especially in the current environment of lowered limits for malpractice insurance due to economics and unavailability. While the receivables account may be a near cash asset, it is not cash until the individual accounts are collected. In addition, this account is a lazy asset in that it does not earn interest until the receivables are collected and put to use. Finally, as A/R are paid to the Physician, income taxes must be paid.
The Solution. Wouldn't it be nice to protect you're A/R from litigation, especially if it could be done in a manner that creates additional retirement income for the Physician? How is it done.
- The Wage Continuation Agreement Assume the physician enters into a formal agreement with the P.A to provide his or her fees "sooner rather than later" and that such fees are in a form agreeable to both the P.A. and the Physician. This means that the fee might also be paid in something similar to cash but not limited only to cash payments. Additionally, as part of the Wage Continuation Agreement, the P.A. recognizes that the physician has already provided the service that created the A/R and that the resulting fees have not yet been paid. The P.A. further agrees to give its best efforts to remedy this situation and to make sure that the Physician is both fairly compensated and protected.
- Additional Funding Since the P.A. usually does not have enough cash on had to meet the obligations of the Wage Continuation Agreement it must find some other source of funding. The bank is the obvious choice. Using the A/R and other assets of the P.A. as collateral, the corporation borrows sufficient funds to meet the new obligation it assumed in the Wage Continuation Agreement. It is important to note that this transaction has little or no impact on the normal fee income generated for the physician resulting from ongoing collections of these same receivables. Also, the bank does not get involved with the collections of you're A/R. In fact, during both the original loan process and at the loan renewal, the bank views the receivables account as a revolving account. In other words, as some receivables are collected, new ones are generated taking their place and these new receivables automatically become part of the collateral. As long as the collectable receivables and other assets in total are sufficient to pay the bank loan, the bank remains satisfied.
- Terms of the Bank Loan; We have established banking relationships to fund this agreement on a very favorable basis:
- The bank agrees to interest only loans that will be called only in the event of default.
- The note is renewed every two or three years.
- The bank agrees to use the accounts receivable as the sole source of collection for the first 6 months in the event the loan is called.
- The bank has an additional form of collateral in the form of a pledged asset resulting from the loan itself.
- Funding Vehicle The funds generated from the bank loan discussed above are transferred to a funding vehicle owned by the physician and the funding vehicle is also pledged as collateral to the bank. Pledging the funding vehicle to the bank avoids immediate income tax recognition. The double collateral enjoyed by the bank (both the investment and the A/R) allows the P.A. to have favorable terms on the loan outlined above. Furthermore, the investment funds are in a form that is exempt from the claims of creditors and not currently taxed.
We have negotiated a special investment product for this purpose.
- What if I am sued? The Accounts Receivable Lock What happens in the event of a judgment against the P.A. and/or Physician? The bank has first lien position against the A/R and the bank's claim precedes the current judgment. In other words, the bank has a prior claim against the receivables and anyone else's claim comes second. At this point, depending on the circumstances at the time, it may even be to the physician's advantage to have the bank call the note. Remember that the bank has agreed to use the accounts receivable as the sole source of repayment for the first six months. Assuming that the A/R are sufficient to repay the indebtedness, the bank is made whole. Since the bank is now satisfied, it releases the collateral assignment against the funding vehicle that it has been holding as additional collateral. The funding vehicle now contains an amount equal to the original loan plus any investment gain or minus any losses. Since the funding vehicle is exempt from the claims of creditors the physician ends up with an unencumbered account in his or her own name that is also well beyond the reach of the plaintiff's attorney. The money that is in the funding vehicle is not only exempt from creditor claims but so is the income that can be withdrawn. For example, the physician could use this funding vehicle as his or her source of income during the period while the bank is collecting the accounts receivable. The same principle applies at retirement. About 6 months prior to retirement, the physician begins to take income out of the funding vehicle and uses the accounts receivable to repay the loan.
While this article has discussed protecting accounts receivable there is much more to A/R Program than meets the eye. In addition to creditor protection, this program takes a lazy asset and puts it to work. While a complete discussion of all of the tax advantages is beyond the scope of this article, they are substantial. The retirement income that can be generated from this program is tax-free under current law and the P.A. does not need to make contributions for anyone else other than the physician. The A/R Program combined with other planning techniques covered in our Asset Protection Seminars can go a long way towards making the physician an unattractive target for litigation while providing additional benefits in the process.
For further information, please contact Ken H. Vanway at 512-263-2886 or firstname.lastname@example.org .
The information provided in this article is not to be construed as legal advice and should not be relied upon without the specific consultation with a professional.