Structuring your medical practice to protect the family home
Are you a medical practitioner? Trading as a trust may be the best way to minimise your personal exposure in the event of bankruptcy.
Depending on your priorities and risk profile, you may wish to trade as a trust to prevent mortgage payments being “clawed back” in the event of bankruptcy. Here, Mahoneys partner Antony Harrison weighs up the pros and cons of such an arrangement for medical practitioners.
What you need to know when structuring your medical practice
Medical practitioners who carry on business as sole traders can only distribute monies received from the medical practice to themselves.
This means that any contribution the medical practitioner makes to an asset (for example, the family home) owned by another person (usually a spouse or partner) is open to be clawed back (usually within 4-5 years of the contribution, but indefinitely in some instances  )if the medical practitioner becomes bankrupt. 
The trustee in bankruptcy’s ability to claw back contributions made to or on behalf of a spouse or partner extend beyond distributions and can attach to the equity in the asset (i.e. market value increases) in certain circumstances.
- Distributions could be made directly from the Medical Trust to the spouse or partner  and
- Those distributions to the spouse or partner would not be subject to the same claw back in bankruptcy because they are distributions made by the Medical Trust, not the bankrupt .
Presuming the medical practice has no other doctors generating income (and that the personal service/exertion income tax rules (PSI Rules) apply), trading as a trust has no taxation benefits.
Distributions to the spouse or partner are still taxed as if they are distributed directly to the medical practitioner.
If a claim arises from acts or omissions of the medical practitioner, there is also no real asset protection benefit to be gained by trading through a Medical Trust.
Therefore, the principal benefit is to prevent the application of bankruptcy claw-backs.
To guard against mortgage payment clawback, it is important that the distributions are, in fact, made to the spouse or partner.
Not only does the ownership of the medical practice in the Medical Trust reduce the chances of the “claw back” provisions applying, it may have other benefits. For example, should the medical practitioner widen the practice to include other income earners (such that the PSI Rules no longer apply), then there may be tax benefits on future distributions to the spouse without the need to restructure the medical practice.
Family home ownership
Regarding the ownership of significant assets (notably the family home), our preference is as follows:
- If the spouse or partner is low risk (e.g. cares for children full time, Government employee), the property should be 100% or 99% in that person’s name; or
- If the spouse or partner is of equal risk to the medical practitioner (i.e. another medical practitioner), either 100% in a trust or 50% each (noting that with the latter, 50% is open to attack). This is usually as joint tenants, but depending on estate planning considerations, may be better held as tenants in common in equal shares.
 A transaction done with an intention to defeat creditors has no time limit.
 e.g. Bankruptcy Act 1966, s 120.
 Usually with the medical practitioner as trustee and appropriate persons as appointors.
 Presuming the trust deed has been drafted appropriately.
 Distributions made by the Medical Trust in the ordinary course of trading are generally not subject to “claw back”. However, transactions intended to defeat creditors or where the Medical Trust was not, for example, solvent would not gain the benefit of that exception. The extent of exposure therefore depends on the frequency of the distributions (usually up to 12 months if distributions are made annually but this could be quarterly, monthly or even weekly – however administration costs increase proportionately).