Florida Asset Protection : Asset Protection Law & Planning in Florida - Florida Homestead Exemption

Often, a high-risk professional will title all assets in the name of their non-professional spouse as an asset protection plan. The professional thinks they are a lawsuit target, but in the event they are sued, they could tell their adversary that they "have nothing in my name." It’s a simple plan, but it sometimes backfires. Here’s an example where putting everything in the name of low risk spouse did not work out.

A woman physician worked in a high-risk specialty. Her husband worked for a large company in a non-professional job. The couple bought investment real estate and titled all parcels in the husband’s name alone. Their bank accounts were in the husbands name, as were some non-retirement stock accounts. You can probably guess what happened.

The husband called me for asset protection advice because he had been at fault in a serious car accident. He had only $20,000 liability insurance. All of the assets titled in his name, and bought mostly with his wife’s earnings, were at risk. Fortunately, the car he was driving was also in his name only so his wife would not be liable for the car accident. What did they do wrong?

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Florida debtors who are head of household can exempt from creditor garnishment unlimited earnings. Questions frequently arise concerning what types of compensation are included in the statute’s definition of "earnings." For example, commissions earned by an independent contractor are not exempt under the Florida statute. Florida courts have held that wage garnishment protection applies to regular compensation dictated by the terms of an arms’s length employment agreement to perform services that are in the nature of a job.

A Florida bankruptcy court considered whether tips earned by a head of household bartender are in the nature of earnings protected from garnishment. The debtor claimed as exempt wages and tips in a bank account. In this case the debtor’s employer charged all customer’s a flat service charge upon all of the debtor’s sales, and the employer paid the service charges as part of the debtor’s paycheck. The bankruptcy court held that the tip payments were exempt after deposit in the debtor’s account. The court noted that the tips were paid as par of a regular bi-weekly paycheck and that there was no allegation that the tips could not be properly traced and identified as earnings of a head of household. In re Holmes, Case No. 09-16564, Southern District of Florida.

The court did not address the issue of cash tips paid directly from customers. As a practical matter, a creditor could never garnish a cash tip before it is paid and most servers do not deposit cash tips in their bank account.

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Husband and wife open a joint bank account at a Florida bank, and on the signature card, they pencil in the words "tenants by entireties" to express their intent that the account be an exempt entireties account. Subsequently, the deposit in the account money from another joint bank account and a joint income tax refund. These facts support clearly the conclusion that all money in the account is owned tenants by entireties, and assuming no fraudulent transfers, the money is protected from the individual creditors of either spouse. It would seem very difficult for a creditor or a bankruptcy trustee to defeat the entireties exemption- not exactly.

A decision by a Florida bankruptcy court found that a husband and wife with the above facts could destroy their entireties exemption by their actions and testimony after this account was opened and funds deposited. Here are the most important facts which undid the couple’s exemption.

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Questions from other attorneys are usually the most interesting; here’s an example. A Florida attorney called me about one of his clients who was concerned about a bank garnishment. The client and his wife had a permanent residence in Florida. While on a temporary work assignment in South Carolina, the husband was sued by a South Carolina company, and a South Carolina court entered a civil judgment. The husband and wife had previously opened a joint bank account at a Florida branch of a national bank. The joint bank account is exempt from garnishment by the husband’s individual creditors under Florida law because its considered tenants by entireties property.

The couple's bank had branches in South Carolina which state does not recognize tenants by entireties ownership. The question was whether the South Carolina creditor could garnish the bank account at a South Carolina branch of the bank using a writ of garnishment issued by the South Carolina court that entered the judgment against the husband.

Florida exemptions can not be exported, so, for example, the husband’s creditor could probably garnish salary earned and paid in South Carolina even though the wages are exempt under Florida law. This debtor’s bank account is somewhat different in that the account was at a Florida branch and deposits were made in Florida. Not being sure of the answer, but intrigued by the question, I called a local creditor attorney who had garnished hundreds of bank accounts in his career.

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The biggest complaint I hear from clients facing potential home foreclosure is that they cannot communicate with anyone from their mortgage lender who has authority to modify their loan or otherwise help them avoid losing their home. People say, "I want to save my home but the bank won’t talk to me about a workable solutions." The Florida Supreme Court is trying to improve this problem through required mediation. The current issue of the Florida Bar News reports that the Florida Supreme Court has approved a managed mediation program recommended by its Task Force created last year to help courts deal with Florida’s foreclosure crises.

The Task Force reported that lack of communication between banks and borrowers was the most significant problem in foreclosure cases. Under the new managed mediation program all residential foreclosure cases will be referred to mediation by Supreme Court certified mediators. The bank must pay all mediation expenses.

Court-ordered mediation requires that both sides, including the large mortgage lenders, have someone present at mediation with full authority to resolve the foreclosure dispute. If the mortgage lender does not have someone with full authority at mediation the court may sanction the lender. Mediation is probably your best opportunity to make a fair deal with your mortgage lender if a deal is possible in your case.

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I am often asked whether or not I have seen changes bank policy regarding pursuit of deficiency judgments after first mortgage foreclosures. I am working on an interesting asset protection case as co-counsel with an attorney who is very experienced defending mortgage foreclosure suits. . Because I have not asked permission to used his real name, I’ll refer to him in this post as "Brad." Brad practices in Lake County, Florida, which is part of "central Florida." Brad told me an interesting story last week.

Brad said he attends monthly Bar meetings frequented by most of the civil court judges and most prominent attorneys in Lake County. He says that he has known most of the judges for many years. At the most recent meeting Brad told me he discussed the foreclosure environment with one of the local judges. This is what the judge told him. In Lake County, Florida, from the beginning of 2008 through the first half of 2009 (when statistics were last reported) there were approximately 11,000 first mortgage foreclosures against residential homeowners. The figure does not include foreclosures of commercial loans. Of the 11,000 first mortgage foreclosures, the number of motions for deficiency judgment was zero. No deficiency motions; no deficiency judgements.

Brad told me that in the past two years he defended about 100 lawsuits filed by second mortgage holders. The second mortgage lawsuits were suits based on the underlying promissory note rather than mortgage foreclosures. He said most of these lawsuits were settled, and that none of the settlements exceeded 20% of the second mortgage balance.

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I occasionally get phone calls about Delaware Series LLC. A "series LLC" is one parent LLC which owns several subsidiary LLCs. Each subsidiary LLC is a separate legal entity. People who own several similar assets, such as multiple rental properties, often use a series LLC where each property is owned by a separate subsidiary LLC. Series LLCs are also used to avoid sales tax associated with rental payments between two affiliated entities. Delaware was the first state to enact a series LLC law in 1996, and their series LLC act is best known. Since then, other states have enacted similar statutes. Florida does not have a series LLC option.

I came across a blog post in theLLC Law Monitor which discusses the Texas series LLC law enacted in 2009. The post gives a good overview of the advantages of series LLC planning as well as several undecided legal issues. The article concludes that, "The law of series LLCs is an infant, still a little unsteady on its feet."

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When a corporation or limited liability company becomes insolvent the business owner often is worried that the creditors will try to "pierce the veil" of the corporation and sue the individual owner for all the business’s debts. Florida courts have made it difficult for creditors to pierce the veil of a corporation or LLC to hold owners responsible for corporate obligations. Creditors who contract with a business entity can pierce the veil and sue the owners only if they show that the corporation or LLC was established for an illegal purpose or if the owners were using the corporation to evade what is really a personal obligation (e.g., using a corporation to incur debt to personal consumption).

Most successful efforts to pierce a corporate veil occur when a "mom and pop" business owner intermingles personal and business finances, such as when he pays personal bills from a corporate account. The corporate veil is pierced in that case because the corporation is the legal alter-ego of the controlling owner. There is a famous Florida Supreme Court case on piercing the corporate veil called the Dania Jai-Alai case.

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A Florida homestead, once established, may be abandoned in which event the property’s homestead protection from creditors is lost. There are many Florida court cases which have discussed the tests of whether an owner has "abandoned" their homestead. Temporary absence or a forced absence from a homestead generally is not abandonment. One important abandonment test is whether the homestead owner has rented the house under a long-term lease to a third party. Rental is consistent with abandonment.

Two Florida attorneys wrote an interesting article in the current Florida Bar Journal about rental and homestead abandonment. The authors discussed how renting a homestead affects the owner’s homestead tax deduction. Their article equally is relevant to renting and homestead abandonment for creditor protection.

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