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

In a blog post earlier this year I reported that the 11^th Circuit Court of Appeals had certified to the Florida Supreme Court the question of whether a charging lien was a judgment creditor's sole remedy against a debtor's membership interest in a single member LLC. The Florida Supreme Court held oral argument on this case on January 8, 2009. A decision should be issued soon. The case is Shaun Olmstead v. Federal Trade Commission, SC08-1009.

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Two clients in the past week have owned homestead properties in a municipality on lots greater than ½ acre in size. Both clients were judgment debtors and were asking if there was a way to protect their entire residence under Florida's homestead protection. One situation was particularly interesting. This client owned 3/4 acres within a city on which he build a main house and a guest house. While remodeling the main house, the client and his family temporarily lived in the guest house. Local zoning and land use laws permitted the client to further subdivide the property. The client understood that Florida's homestead law protected two-thirds of his 3/4 acre homestead within the city limits. The client asked if he could convey one-third  of the homestead lot to a family partnership which itself offers some asset protection reserving ½ acres under the homestead umbrella. The client, his spouse, and his children would be partners in the partnership. The client proposed that the land transferred to the new partnership would not include the main house or the guest house.

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The Florida Constitution protects 160 acres of contiguous property used as the debtor's primary residence. Sometimes people ask me why Florida has such a large homestead exemption and what is the signficance of 160 acres. A recent article in the Florida Bar Journal discussed the history of Florida's homestead exemption.  Bar Journal Article. The article traces our homestead exemption to the Armed Occupation Act of 1842 enacted by the U.S. Congress to help attact people to new U.S. territories including Florida. The law set the maximum homestead at a quarter section of land, or 160 acres. You may have learned in school that a section of land is 640 acres. The policy basis of our homestead law is interesting. The homestead provisions are not intended to shield wealthy debtors from their creditors. The Constitutional homestead law comes from the public policy of attacting people of modest means to the new Florida territory and providing them a secure and protected estate which they could farm and could build a secure future for their family.

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Most families want simple estate plans. Sometimes the simple plan, a will leaving our money to our children equally and immediately upon our deaths, is a really bad estate plan in the event any of our children have legal problems after our deaths. A better plan, for asset protection, is an estate plan that holds the childrens' inheritance in a continuing trust where it remains protected from our childrens' creditors as long as they keep the trust in effect. A caller this past week told me his parents, recently deceased, had made a living trust which provided for the immediate distribution of his inheritance. The parents' trust was in the process of administration. The caller was concerned because he had a large potential judgment creditor. I explained that a judgment creditor could levy upon his share of the inheritance. The creditor could garnish the money payable to the debtor from the living trust.

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Florida Statute 222.11 protect from garnishment wages and other compensation earned by a head of household, and it further exempts wages deposited in the debtor's bank accounts. . A client asked me this week if workers' compensation payments were exempt under the wage exemption statute. The client thought that if the law protects wages paid to an employee the law should also exempt money paid on account of injuries incurred during employment. I found that the wage exemption statute, 222.11, does not exempt workers' compensation, but that other Florida Statutes provide an exemption from creditor garnishment.

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Business arrangements among family members are usually informal without full legal documentation. Casual business dealings among family members work fine between the family members themselves as long as the family relationships are on good terms. But, when the same family members have creditor problems an informal family business dealing can lead to problems when proper documentation is lacking. Consider a caller who described a property he purchased with his parents. The deed showed the parents and a child each had an undivided 50% interest in the property as tenants in common. This means that each 50% interest is separate from the other 50% interest. The parents paid cash for their interest. The child borrowed 50% of the purchase price to pay his part of the purchase. The child made all the mortgage payments by himself. The bank demanded a mortgage on the entire property, not just the child's half, to secure the loan. The property has not changed value since the purchase.

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A homeowner may incur income tax liability for debt forgiveness when a bank forgives a portion of a mortgage either by taking a deed in lieu of foreclosure, through a short sale for part of the mortgage balance, or by relinquishing rights to a deficiency judgment after foreclosure sale. Owner occupants are exempt from imputed income. A caller this past week asked me about income tax treatment from a mortgage modification. In this case, the mortgage lender had proposed forgiveness of past-due interest and late fees. The accounting question is whether the modification has the same income tax effect as forgiveness.

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Most parents want to keep their estate planning simple. The simple estate plan is not the best plan when your children are vulnerable to lawsuits. If a parent dies leaving money to his children outright and one of the children has an outstanding civil judgment at the time of the parent's death, the child's creditors can seize the inheritance to satisfy the judgment. If the child puts the inheritance in a joint account with his spouse in an attempt to protect the money under the tenants by entireties exemption the creditor in most cases can reverse the conveyance as a fraudulent transfer placing the inheritance back in the child's own name where it could be used to satisfy the judgment. Few parents anticipate their hard-earned estate going to a creditor of one of their children. Proper estate planning protects your money not only from your own creditors during your lifetime but also from unknown future creditors of your children.

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