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

New client is confident he has protected a substantial of cash proceeds from the sale of a business by depositing the money in a bank branch in his native country of Ecuador. He is confident that none of his creditors could figure out how to domesticate a U.S. civil judgment in Ecuador. Even if they could domesticate a U.S. judgment in his country, the creditor would have to bribe the right government officials to levy on his account. I told him that most of my other asset protection clients would not feel comfortable having so much money in an Ecuadorian financial institution. No problem, he said, this Ecuador bank is covered by our FDIC insurance.

Really !?!. Does this dude think the U.S. government insures banks that are wholly offshore institutions with no U.S. presence? Isn’t more likely that this client has deposited his money in the Ecuadorian branch of a U.S. bank or at least a bank with offices or branches in the U.S. where the creditor can easily serve a writ of garnishment. General rule: if its FDIC insured it’s probably not an "offshore bank" beyond the reach of your creditors.

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Asset protection planning sometimes involves knowing and purposeful fraudulent conveyances. An attorney from south Florida called me recently to discuss the following plan he would propose to his client. His client, a married man, was a defendant in a civil suit. The judge had just granted the creditor’s motion for summary judgment, and the judge would probably enter a final judgment as soon as the creditor submitted proof of damages.

The man owned a one-acre lot upon which he was constructing a house to be his future homestead. The problem is that the court would be entering a final money judgment before the house was completed and occupied. The final judgment would be automatically a lien on the lot. Subsequent occupancy as a homestead would not remove the pre-existing lien.The attorney wanted to know if he should advise the client to quit-claim deed the lot to his wife for the remainder of construction and then have it conveyed to joint ownership when the couple moved in as their new homestead. I think the plan would work.

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A client established several years ago a bank account to save for his children’s education. The bank opened the account as a Totten Trust. The client said he knew his kids’ account was protected from judgment creditors because I had stated, somewhere on my website, that bank accounts established for children is exempt. I responded that regardless of what he read the proper way to protect children’s money from your creditors is by setting up a bank account under the Uniform Gift to Minors Act (UTMA) rather than a Totten Trust.

A "Totten Trust" is a common law concept that refers to a financial account with money held in trust for another person. Some banks will open accounts for the benefit of other persons as Totten Trust. Florida law considers Totten Trusts to be revocable at will during the grantor’s lifetime. Because the grantor may rescind the trust and receive Totten Trust money, so can the grantor’s creditors capture same funds. Florida bankruptcy attorney Jordan Bublick posted a good explanation of Totten Trusts in his blog.

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I don’t defend mortgage foreclosure suits against my asset protection clients, and instead, I refer people to one of several real estate litigation attorneys who do a good job forestalling foreclosures and negotiating releases of personal liability. I spoke this weekend with one such foreclosure defense lawyer about his foreclosure defense tips.

This attorney  said that many people expect him to assert the most aggressive and comprehensive defense against the bank’s foreclosure. Many people have heard of foreclosure defenses based on Truth in Lending violations and technical defects in the bank’s HUD statement and other closing documents. This attorney explained why in his opinion the maximum defense is not always the most practical defense. He said that his clients realize that they cannot ultimately escape foreclosure, but that most are willing to relinquish their home for a release of deficiency liability.

He has found that most large lender foreclosure firms have at least two groups of attorneys. The most experienced litigators deal with the most complicated mortgage foreclosure cases, including those cases where the borrower’s attorneys have raised sophisticated legal defenses. Most foreclosures, including uncontested cases and the basic defenses, including the "lost instrument defense" and technical legal procedure issues, are handled by less experienced attorneys and other staff.

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Asset protection planning deals mostly with civil money judgments. When it comes to family law, there are fewer asset protection options available to avoid awards of alimony and support of a former spouse. For example, judges in divorce cases can order an allocation of retirement accounts which are exempt from regular judgment creditors. The homestead exemption is the strongest asset protection tool, but does it work equally well in a family law context. A caller asked me whether a court can force the sale of a former spouse’s homestead property to pay court awarded child support or alimony.

There is at least one case which held that a spouse could force the sale of a homestead to enforce a support order. In that case, the court reasoned that the purpose of the homestead protection is to protect the debtor’s family, and that the debtor cannot hide behind the homestead shield to the detriment of those family members it was designed to protect.

More recent decisions have held that there is no alimony or support exemption to homestead protection. If the creditor spouse can demonstrate that the spouse who owns the homestead property acted fraudulently, reprehensibly, or egregiously to acquire or use the homestead exemption to avoid paying an alimony or support order then the court could impose an equitable lien on the homestead property. However, I think most courts will agree that a former spouse cannot force the sale of homestead to fund an alimony or support obligation.

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Last August I published a post about a Florida state appellate court decision holding that inherited IRAs are not exempt from creditors. The Florida court held that Florida Statute 222.21(a) is intended to protect only IRA funds which the debtor himself contributed to an IRA from his own earnings and for his own retirement, and that IRAs inherited from another family member (other than a spouse) where not exempt under the Florida statute.

I read a blog post by Missouri bankruptcy attorney Wendell Sherk reporting on a decision by a federal appeals court for the eighth circuit wherein the federal court reached a contrary conclusion. The federal court held that under federal bankruptcy law there should be no distinction between an inherited IRA and the debtor’s own IRA. According to Mr. Sherk, this court decided that bankruptcy law protects all " retirement funds" and does not require that they specifically have been funded by the debtor with his or her own funds. The case is : In re Nessa ___ B.R. ___, #10-6009, (8th Cir.BAP 4/9/10)

The Florida state court and the federal appeals court interpreted different laws. The Florida court considered a Florida statute and the federal court looked at the inherited IRAs under federal bankruptcy law. Nevertheless, the eighth circuit federal court decision provides a strong argument in favor of inherited IRA protection should the issue come up in a Florida state court or a Florida bankruptcy court.

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Many people do not understand the significance of tax form 1099 in the foreclosure context. A 1099 is an IRS reporting form indicating that the lender has written off a mortgage and is declaring a tax loss. The borrower may have to declare the bank’s loss as imputed income. There are many exceptions to imputed income discussed in previous blog posts.

If a lender forgives a borrower’s personal liability on a mortgage the lender is supposed to issue a form 1099. Liability waiver always results in the issuance of a form1099. But is the opposite true? Does a form 1099 always result in a release of borrower liability? A reader submitted by email the following question:

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I received an interesting email question about wage garnishment issued outside of Florida against a Florida resident. The questioner resides in Florida and works for a Georgia company at its Florida office. The questioner has a civil judgment entered against him in Florida. The questioner’s pay check is issued by the employer’s payroll office located in Georgia. He is married and is head of household under Florida law. He asks whether his wages would be garnished if the creditor domesticates the judgment in Georgia and serves a writ of garnishment against his employer at the Georgia headquarters.

This debtor is entitled to Florida’s exemption against wage garnishment as long as he permanently resides in Florida. If the employer has a Florida office, which question implies it does, then the creditor will cause the Florida court which issued the judgment to serve the employer at its Florida office. A Florida court should dissolve the garnishment. If the employer did not have a Florida office then the creditor might transfer the judgment to Georgia and serve the writ in Georgia. The debtor could assert his Florida exemption in a Georgia court.

The debtor’s wage garnishment protection is determined by his residence and not where the creditor serves the writ of garnishment on the employer.

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Finally, one of my clients reported a common sense resolution to an upside down mortgage. This man’s primary residence in Florida, like so many other homes, was substantially upside down. Short sales did not work because buyers did not want to wait for the bank’s long approval process. The bank foreclosed. This case had a happy ending. The bank agreed to take back the property and give the man a full release of liability. Even more, the bank paid the man cash back to pay for his moving expenses. "Are you serious", I asked. "Yes", the man replied. Its "Cash For Keys."

Yes, there are some mortgage lenders who will pay you to surrender your upside down house and move out. My client explained that the "cash for keys" offer is contingent upon the buyer delivering the house in good condition. The bank’s representative explained that many homeowners purposefully damage homes in foreclosure and remove appliances and fixtures. It makes sense. The lenders gets control of the property and can avoid its physical deterioration. The lender can more quickly put the house on the market and minimize its expenses. The borrower receives an unexpected cash reward for cooperation.

There have been press reports about cash for keys programs. These programs are not yet widespread but they may be increasing as mortgage lenders experience dissatisfaction with traditional foreclosures.

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Involuntary bankruptcy keeps asset protection clients awake at night. Involuntary bankruptcy is the one thing that debtors cannot plan for nor control, and it is the most powerful creditor weapon against an otherwise effective asset protection plan. Why? Because debtor’s protections in a Florida bankruptcy court are much weaker than they are in state court. For example, a Florida debtor can protect unlimited money in a Florida homestead, and full protection is afforded immediately upon purchase and occupancy. Under the new bankruptcy law, however, the purchase of a Florida homestead within two years prior to bankruptcy is reversible as a fraudulent conversion and protection is capped at $137,000 for 40 months after purchase.

So how real is the threat of involuntary bankruptcy against wealthy Florida debtors? Is involuntary bankruptcy a "clear and present danger," or does this threat sound worse than it really is.

I have never been involved in an involuntary bankruptcy proceeding because no such petition has ever been filed against any of my asset protection clients. Other attorneys I’ve spoken with report similar experience. I decided to investigate this question by asking people in the bankruptcy system who have a superior perspective. This past week I discussed involuntary bankruptcy with a law clerk for a bankruptcy court judge in Florida’s middle district and a Chapter 7 bankruptcy trustee. Both people were cooperative and interested in the question. The law clerk has been serving as a bankruptcy law clerk for the same bankruptcy judge for almost six years. The trustee has been a full-time Chapter 7 trustee in our district for 18 years. Here is what they had to say about involuntary bankruptcy.

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I was working this week with a married client who owned a piece of real property in his own name. The property had equity which equity the client wants to protect from a potential judgment creditor. The client proposed refinancing the property to cash out the equity. He suggested depositing cash from the refinance in a joint checking account which he understood is exempt from his individual creditors as a tenants by entireties account. He and his wife each have individual bank accounts as well as a joint account.

I explained to this client that his plan could be challenged as a fraudulent transfer. Because this property is titled in his name alone he owns any proceeds from its sale or refinance. His refinance money should be deposited in his own bank account. Depositing money obtained from his solely owned property into a tenants by entireties bank account owned with his non-owner spouse may be considered a fraudulent transfer of his equity to his wife, or a fraudulent conversion of money to an entireties account.

A better plan would be to have his wife co-sign the promissory note to the bank which refinances the property. If the wife makes herself jointly liable to repay the refinance proceeds she logically is entitled to some ownership in the loan proceeds. If both husband and wife have an interest in the loan proceeds it makes sense to deposit the money into an entireties bank account. Of course, a default on the jointly guaranteed loan has more serious consequences as all jointly owned assets would be at risk, but the protection of the money from the husband’s prospective creditors may be worth the additional risk of a joint debt.

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