Florida Asset Protection Law Blog | Attorney Jon Alper

I saw an email about income tax liability associated with foreclosure or bankruptcy sent by attorney Larry Heinkel. The email addresses income tax liability from the foreclosure of properties which have previously been depreciated for tax purposes. Most people know that if a bank forgives part of a mortgage loan in the course of a short sale or deed in lieu that the amount of debt forgiveness may be taxable if the mortgaged property is an investment or second home. A new law has eliminated debt forgiveness tax for principal residences. A person who is insolvent at time of short sale or deed in lieu, or who files bankruptcy, has no liability for debt forgiveness taxation. Mr. Heinkel points out a different tax trap.

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A husband purchased a large life insurance policy naming his wife as beneficiary. The policy accumulated cash value. The husband and wife had joint creditors. The husband died and the insurance company paid the policy proceeds to the surviving spouse. The surviving wife asked me if the creditors can go after the life insurance proceeds

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Previous posts on this blog have discussed income tax risk associated with giving banks a deed in lieu of foreclosure or arrangements for a short sale. The general rule is that foregiveness of debt, including a bank's waiving mortgage deficiency liability, is taxable income. Last month, December, 2007, Congress passed a bill to relieve many homeowners from income tax liability associated with deeds in lieu, short sales, or foreclosure. The Mortgage Forgiveness Debt Relief Act of 2007 states that homeowners will not be subject to income tax from release from mortgages used to buy or improve their primary residence. Mortgage Forgiveness Debt Relief Act of 2007

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A man owned a home and decided to get married. Before the marriage he created a Florida corporation and deed his home into the name of the corporation. He owned all the shares of the corporation. Later, when the husband wanted to refinance the house the lender inquired whether the non-owner spouse had an interest in the homestead which she would have to waive in order to give the new lender an enforceable mortgage. Although this issued arose in the context of a real estate transaction, the issue is relevant to understanding homestead rights and protection.

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Limited liability companies provide asset protection benefits, not because the membership interest in an LLC is exempt from levy and collection, but because the Florida statutes limit a creditor's collection remedies to that of a charging lien on LLC distributions, if any, to the debtor. This past week a client with a valuable membership interest in a multi-member LLC asked whether his LLC interest would be protected from a trustee in the event the debtor filed bankruptcy. The issue is whether collection restrictions imposed by Florida statutes, or other restrictions imposed on creditors by the LLC operating agreement, are binding upon a bankruptcy trustee. It seems that the answer depends on terms and conditions of the LLC operating agreement, and upon interpretation of an uncertain issue by the particular bankruptcy judge.

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Prior to a judgment being entered against him a judgment debtor owned financial accounts jointly with his wife. He and his wife created a joint living trust for estate planning purposes. They transferred title of the financial account to their joint trust. Property owned jointly by the debtor and his wife is exempt from the judgment against the husband/debtor because the property is deemed to be owned as "tenants by entireties." The issue is whether the same financial account is tenants by entireties property after it was titled in a joint living trust.

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A client presented an interesting question about tenants by entireties ownership. Client was married with children. His wife and children lived in New York. The client lived primarily in Florida where he ran his business. The client had a Florida drivers license, used Florida as his primary address, and appeared to qualify as a Florida resident. Before getting married, the client and his then girlfriend opened a joint stock account at the New York office of a national brokerage. The client is being sued and wants to know if his brokerage account is protected as tenants by entireties property.

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