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

Nevada passed a law this year applying the charging lien remedy to stock in a multi-shareholder  Nevada corporation. Charging liens are the creditor’s remedy to attack a debtor’s interests in limited partnerships and LLCs in most states. In Florida, the charging lien is a creditor’s exclusive remedy against limited partnership interests and an optional, but non-exclusive, remedy against debtor’s Florida LLC interests. Prior to the Nevada law, no state had said that judgment creditors are restricted to a charging lien , instead of levy and sale, of a debtor’s stock in a corporation.

Does the Nevada statute provide an asset protection tool for Florida debtors? There are no cases on this brand new statute, but I think the likely answer is that a Florida creditor may levy upon a Florida debtor’s stock in a Nevada corporation notwithstanding the Nevada statute stating that creditors a limited to charging liens. A levy is an action against the debtor’s stock certificate and not against the corporation. A creditor does not have to make the corporation a party in a levy proceeding, and therefore, the forum of the corporation is not controlling on the Florida remedy. I think a Florida judge will be able to permit creditors to levy upon Nevada corporate stock.

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Some people use offshore trusts or LLCs for asset protection because offshore jurisdictions have shorter statutes of limitations for fraudulent conveyance claims. For instance, if a U.S. debtor uses non-exempt cash to purchase a parcel of real estate in a foreign country or fund a foreign trust a creditor has a limited time to attack the property purchase as a fraudulent transfer. Under the law in most states, including Florida, the creditor has four years to bring a fraudulent transfer action. In many foreign countries the creditor has only one or two years to challenge a fraudulent transfer. Most asset protection planners and clients assume that a creditor’s challenge to a fraudulent transfer to a foreign trust or LLC, or the transfer of a foreign property, limits their creditors to the shorter statute of limitations of the offshore jurisdiction where the property or trust is located.

In the course of researching an unrelated  foreign property issue I came across a federal appellate court case which suggests that the longer U.S. statute of limitations can apply to a fraudulent transfer by a U.S. debtor involving foreign assets or entities. In this bankruptcy case a U.S. debtor transferred real property he owned in the Bahamas to another U.S. resident who was not a debtor for no consideration. The debtor filed bankruptcy, and the trustee attacked the transfer seeking to recapture the property into the debtor’s bankruptcy estate. The bankruptcy estate includes assets in all countries. The debtor’s transfer was after the Bahamian statute of limitations but within the U.S. statute of limitations.The debtor argued that the Bahamian time limit applied because the property was located in the Bahamas.

The federal appeals court held in 2006 that the longer U.S. statute of limitations was applicable to the property transfer because the transfer was between two U.S. parties. The statute of limitations applicable to the trustee’s action was where the transfer took place, in the U.S., rather than where the property was situated despite the general rule that law applicable to real property is the jurisdiction where the property is located. 440 F. 3d 145

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Many single member LLCs have been established to own stock in subchapter S corporations as part of asset protection planning. Before the LLC became the most popular business entity attorneys and accountants typically advised clients to operate a business as a sub-S corporation. As the asset protection benefits of the LLC became better known, the sub-s owner wanted to change his business ownership from a corporation to an LLC. The problem was that there are often tax problems, and also legal restrictions in some professional businesses, associated with converting an s-corp to an LLC.

The solution was to set us a single member LLC and transfer the s-corp shares to the single member LLC. This plan provided better asset protection subject to uncertainty about application of asset protection benefits to a single member LLC. Now that the Olmstead decision has undermined the asset protection benefits of multi-member as well as single member Florida LLCs, people with s-corp shares in a single member LLC are looking for asset protection solutions.

A well-known tax attorney from south Florida asked me whether I thought it possible to create a limited partnership which could elect to be taxes as an s-corporation and then transfer s-corporation stock from an existing LLC to the newly formed partnership. IRS rules prohibit S-corp shares from being owned by an entity taxed as a partnership, but a partnership electing taxation as an s-corp could possibly own the s-corp shares that were previously assigned to a single member LLC for asset protection.

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Two articles in the news this week are interesting for people trying to get out of  mortgages.on upside down real estate.  The first article published online on marketwatch.com addressed people's frustration with the long time it takes to get short sales approved.  The article stated that lenders require extensive time in short sale applications to, among other things, verify property value and make sure that proposed short sale is between unrelated, arms-length parties.

The second article in July 19, 2010,USA Today reported that Fannie Mae and FHA were trying to crack down on mortgage defaults by people who financially could afford the mortgage payments- the so-called "strategic defaults." The article did not say that these agencies were now actively pursuing deficiency judgments, as many people publically speculated would happen, but the article did report that Fannie Mae and FHA would be denying new mortgages for many years to anyone who strategically defaulted on  a prior mortgage insured by these agencies. The article stated that Congress was about to pass legislation that barred future FHA mortgages to people who were foreclosed when they had the ability to pay.

In my opinion, these policies are reasonable but difficult to apply fairly in the future when someone who previously went through foreclosure applies for a mortgage on a new home. The underwriter will have to investigate the applicant's financial situation many years ago when the foreclosure took place. It may be hard for the applicant to prove financial hardship years after documents may have been lost or destroyed. Most of my clients who consider mortgage defaults accept that future mortgage applications will be difficult. They are more concerned about their current financial difficulty and prospective deficiency claims. I do not think that threats of future financing problems will deter many people considering strategic defaults.

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Over the years I have recommended Nevis limited liability companies to many asset protection clients. Most people who have formed a Nevis LLC has asked about how and where his money will be invested within the LLC entity. I do not get involved in the transfer of assets to offshore LLCs or the financial management of LLCs assets, yet I have learned through experiences of many clients and discussions with their chosen LLC managers how assets are maintained and invested within a Nevis LLC. .

Asset management within a Nevis LLC is similar to discretionary financial accounts offered by most U.S. financial institution. A discretionary account is when you, the client, appoints a financial entity to invest your money on your behalf. The financial manager makes all decisions about what to buy and sell subject to your stated objectives. If you appoint a financial company as offshore manager of your Nevis LLC the management company and its employees do not actually manage the LLC assets. Instead, the LLC manager hires a financial institution outside the U.S. in a discretionary capacity. Offshore money management firms used by my own clients include BNP Parabas (France) and Clariden Leu bank and RBS Coutts (Swiss). Fees charged by the offshore financial managers are similar to fees charged in the U.S.

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Setting up an offshore trust or a limited liability company involves hiring a trustee or LLC manager in a foreign jurisdiction. The offshore entity works well only if the debtor owner/beneficiary irrevocably gives the offshore manager control over the LLC and investment of LLC assets. Many people who anticipate using an offshore entity as part of their asset protection plan are initially reluctant to turn over complete control to an offshore management company. These people have named themselves as manager initially, and they plan to resign and turn over control to an offshore manager only if and when a creditor has gotten a civil judgment as is actively trying to collect the judgment.

Delaying appointment of an offshore trustee/manager until the creditor is "at the door" is not going to work in most cases. An offshore manager told me recently that his company is refusing appointment by U.S. debtors against whom a judgment has been, is about to be, entered. The offshore company does not want an appointment that is going to involve themselves in collection litigation from the beginning. Although the offshore manager will loyally defend collection actions against long-term clients, they do not find it profitable to be used only as a crises solution. Additionally, offshore managers are using more sophisticated methods for their due diligence investigation of prospective customers and are requiring the customer to submit in advance social security numbers and tax returns to assist in the investigation.

If you plan to use offshore LLCs, offshore corporations, or offshore limited liability companies in an asset protection plan be prepared to choose and appoint an offshore manager/trustee from the beginning. If you are fearful of relinquishing management authority over your entity then you should stick with simpler domestic asset protection tools.

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Can a debtor protect a future legal interest in his primary residence under Florida homestead laws? In this bankruptcy case a debtor’s mother owned a property where the mother and the debtor resided with the debtor’s spouse and children. The mother executed a deed transferring title to the debtor reserving a life estate to the mother. (A "life estate" means the mother owns and controls the property and as long as she is alive). The debtor’s mother was old with a short life expectancy.

The debtor filed Chapter 7 bankruptcy and claimed his future legal interest in his mother’s house as an exempt homestead asset. The trustee objected to the debtor’s exemption because the debtor’s interest in the property was only a future "remainder interest" (meaning the debtor has no vested ownership until the mother dies). The trustee wanted to take and sell the debtor’s interest in the house which would vest upon his mother’s death in the reasonably near future.

The court said that the debtor’s future ownership rights was protected under Florida’s homestead laws. The court pointed out that the debtor occupied the home with his family as a family residence, and that the debtor contributed financially to the repairs and upgrades to the house. The court held that the debtor’s present right of possession is sufficient to qualify the house as an exempt homestead. In re: Williams Case No. 3:09-586.

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