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

I often receive phone calls from out of state resigned that they cannot achieve any of Florida's asset protection benefits because they do not reside in Florida- not exactly. While it is true that Florida's statutory creditor protections are specifically limited to Florida residents and Florida homestead presume permanent Florida residence in the house, Florida law does include asset protection available to non-residents, and even to people who have never set foot in Florida.

I’m referring to tenants by entireties protection available to a single debtor of a married couple.. Tenants by entireties protection from individual creditors is based on Florida common law defining Florida property. The concept applies to Florida property regardless of the owners’ residence. I wrote a post on this topic last year, but its worth repeating for current readers because most callers from outside Florida still think they have to move into their Florida house as a homestead in order to protect the house from judgments.

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 In January of this year a federal district court in Florida held that a debtor’s stock account owned by he and his wife as tenants by entireties was not exempt against collection of a judgment in favor of the Securities and Exchange Commission.

Mr. Solow allegedly engaged in a fraudulent stock trading scheme that caused millions of dollars of investor losses. The court entered a judgment against Solow in favor the SEC, in part, ordering Solow to disgorge ill-gotten profits from the fraud. Mr. Solow and his wife liquidated a tenants by entireties stock account in the midst of litigation and moved the money to an offshore trust. The court held that the funding of the trust was a fraudulent conveyance against the SEC notwithstanding that the entireties brokerage account may be exempt from judgment creditors under Florida law.

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Creditors cannot garnish wages of Florida resident who is head of household. Wages earned by the spouse who is not head of household is subject to garnishment. Sometimes clients ask me what compensation is included in the definition of "wages" which are either exempt or are subject to garnishment.

This week I met with a married joint debtors. The husband debtor had a job and his income supported the family. The wife debtor has lost her job and was receiving unemployment compensation from the government. The couple understood that the husband’s wages were exempt, but he wanted to know if the joint creditor could garnish unemployment benefits paid the wife debtor. If unemployment income is a form of wages then it logically could be garnished.

Unemployment benefits may be income for tax purposes but the payments are not wages subject to garnishment. Florida Statute 443.051 states that any unemployment compensation payable under state law may not be assigned and are exempt from all creditor claims.

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A judgment creditor cannot garnish wages of a Florida domiciled debtor who is head of household. Assume, that a creditor sues the Florida resident in Georgia and gets a money judgment against a Florida resident based on a transaction in Georgia. . During the proceeding, the debtor was a full time resident of Florida and worked in Florida. The employer had an office in Georgia, but it paid the debtor his salary in Florida. Do you think that the Georgia creditor can garnish the wages in Georgia at the employer’s Georgia address, or can the debtor assert his Florida wage exemption because he is a Florida citizen?

Similarly, suppose the Florida debtor had lived previously in Georgia many years ago, and that when he Georgia he opened an annuity investment account at the Georgia office of a national finance company. Surely, Florida statutes exempting IRA from creditor levy would protect the debtor’s IRA account.

The Florida statutory exemptions will not protect the debtor in Georgia. The Georgia creditor can garnish his wages paid in Florida and his annuity to the extent either are not otherwise exempted under Georgia laws. There is a general rule of law that exemptions cannot be exported, so that most courts in other states will not recognize exemptions afforded to Florida residents. In other words, exemption laws have no extraterritorial effect.

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One of my asset protection clients recently moved to Florida from Arizona with his family. The client is being sued in Arizona, but his wife is not a defendant. They jointly own a house in Arizona which they have rented. The house has no equity currently. However, the house is fully furnished with furniture purchased during their marriage. The client understands the plaintiff and potential creditor will have a lien on the Arizona house if the plaintiff wins the lawsuit. The client asked me if the furniture in the house is exempt as tenants by entireties property because he and his wife are now Florida residents.

The general rule is that a judgment creditor levies upon real property in the state where it is located. The rule regarding personal property is more complicated. A judgment creditor is not limited to any one state in pursuit of a debtor’s personal property. A creditor can levy upon property wherever he can find it. If this creditor and his wife buy furniture for their Florida home the furniture would be exempt as tenants by entireties property. However, Florida debtors cannot export exemptions to other states. Arizona is a community property state that does not recognize tenancy by entireties ownership. The debtor cannot assert entireties protection for his Arizona furniture, and a judgment creditor could levy upon the debtor’s interest in all personal property the creditor finds in the previous home or anywhere else in Arizona.

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Debtors fear court imposed asset freezes prior to judgment. If a creditor can convince a court to freeze a debtor’s assets after the creditor files a lawsuit but before the cases is decided and judgment is entered the debtor cannot engage in further asset protection planning. For instance, a court ordered injunction against the debtor or the debtor’s financial accounts could prohibit the debtor from buying a Florida homestead even though the homestead could not be reversed under fraudulent transfer laws. Many of my clients over the years have asked me if their creditor could obtain a court ordered asset freeze during their civil litigation.

The answer is legally complicated and depends on nature of the underlying civil action and specifically, what  relief  the creditor is asking for and/or is authorized by statute to obtain against the defendant. The U.S Supreme Court ruled that a court may not freeze a defendant’s assets when the plaintiff is seeking monetary damages. The Court held that a court does not have the authority in an action at law brought by a private plaintiff to freeze a defendant’s assets to preserve the assets for collection of potential money damages. Federal appellate courts have pointed out that the Supreme Court’s holding does not bar courts from freezing asset to preserve them for equitable remedies. Freezing assets is a well accepted equitable remedy to "preserve the status quo" and is proper in a lawsuit seeking equitable relief.

Asset freezes are most common in actions brought by federal agencies because the underlying enforcement statutes typically grant the government broad equitable remedies. I have  represented several clients whose assets were frozen during litigation with government agencies.

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The Wall Street Journal published an article this past Tuesday by James R. Hagerty on "strategic mortgage defaults." Aa "strategic default" occurs when a homeowner who can afford to make mortgage payments decides to stop paying and allowing the bank to foreclose. The article states that strategic defaults are often motivated by "anger, fear or despair." Mr. Hagerty states that strategic defaults may be rational response by underwater homeowners. In any event, the percentage of mortgage defaults by people who could afford payments has risen substantially in the past two years. The article suggest ways to reduce strategic defaults.

In my asset protection practice I have consulted with many, many people about the consequences of voluntary mortgage defaults. In most, but not all cases, I have advised my clients whose homes are substantially upside down in value to let the bank foreclose rather than deplete retirement funds and savings accounts. Up to now, this advice has turned out well for most, if not all, of my clients facing foreclosure. I and my clients have found that most large banks are not aggressively pursuing either deficiency claims or the collection of deficiency judgments.

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Husband tells me his automobile is protected from creditors because his wife has a recorded lien on the title. The story is that when this man bought the car in February, 2005, he put this wife’s name on the title as a lien holder. He states he cannot recall how much, if any, money his wife loaned him from her separate funds to finance the purchase, and he has no record of periodic loan payments to his wife. This year, after this same man was sued, he man transferred the car title to his wife as a "repayment of her loan and in satisfaction of the lien", so he says.

Is this a fraudulent loan, and is the transfer of the car title to the wife a fraudulent conveyance? Probably. The creditor would have to show that the original lien and loan was fraudulent to creditors in order to invalidate the transfer of title in satisfaction of the lien. The creditor’s problem is that the original loan and lien are five years old and took place the statute of limitations for fraudulent transfers. If the original loan is not invalid then the debtor may be able to defend a fraudulent transfer attack on the conveyance of title this year to his wife. This debtor would be in better position if he had just left title in his name subject to the five year old lien.

I asked this man if he had spoken with his CPA about the tax treatment of his title transfer in 2010. The wife’s forgiveness of her loan and lien may result in 1099 income to the husband. I’m not sure if the wife can take a corresponding investment loss because I don’t know if the wife’s transaction qualifies as a business investment. Interesting question for the couple’s accountant.

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A few days ago I wrote a blog post comparing the asset protection of Totten trusts and UTMA("uniform gift to minors") financial accounts. I explained that the Totten trusts were not protected from creditors because the accounts could be revoked or invaded by the parent, whereas the UTMA accounts were protected because deposits made to these accounts are legally irrevocable. The asset protection of the UTMA account presumes that the parent follows the law.

A caller from Miami had read the UTMA blog posts and wanted to confirm the protected status of his child’s account. The story is told that a few years ago when the caller was "rich" he made a six figure deposit into his only child’s UTMA bank account. His intent was to set aside some money for his child’s college education. Then, the recession. The caller lost over a year ago. He spent his savings supporting his family. In his last effort to keep his house he began paying his mortgage from his child’s UTMA account. He called me because he just wants to make sure that his increasingly angry creditors cannot get the UTMA account so he’ll be able to keep the house until he finds work.

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