Florida Asset Protection Law Blog | Attorney Jon Alper

Today’s issue is, what do you have to do to transfer ownership of personal property. I recently interviewed an asset protection client who owns a failing business and anticipates possible litigation. The client’s assets are generally either exempt or of small value. He does own one thing of significant market value and enormous sentimental value; a very rare and very old grand piano inherited from his great-grandparents. He stated the piano was worth over $250,000. In 2003, this man had some creditor problems which he was able to resolve. He  decided then to try to protect the piano in the event he ran into similar problems in the future. In 2004, he prepared, signed, and had notarized  a bill of sale conveying this piano to his son who lives up north. He asked if the bill of sale would protect his piano from future creditor attacks.

The client is beyond the four year statute of limitations for fraudulent transfer because the bill of sale was executed in 2004. The creditor cannot reverse the transfer even if the client admits he transferred title to protect the piano from creditors. I think the client’s problem is his retained possession of the piano. A court may not recognize the son’s ownership because the son never had physical possession of the piano.

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Often, parents will put their children on titled to their homestead to facilitate title transfer upon the parent’s death as part of “do it yourself” estate plan. Sometimes the parents add children on the title as joint tenants with rights of survivorship. Other parents transfer the title of their residence to their child’s name and reserve a life estate so the parent can remain in the home as long as they are alive. In the latter case, the parent holds the life estate, and the child owns what is known legally as a “remainder interest” in the house, that is, the child owns what “remains” after the life of the parent. A few days ago a clients asked me if his remainder interest in his parents homestead was exempt from the client’s own judgment creditors under Florida’s homestead exemption.

The answer depends upon whether the child/debtor occupies the house with the parent. The Florida Supreme Court held that a creditor’s judgment attaches as a lien to a child’s remainder interest in the parent’s homestead where the child does not live in the house until after the expiration of the parent’s life estate and where the child’s creditor gets a judgment while the parent is alive. The Supreme Court said that a debtor with nothing more than a remainder interest subject to his parent’s life estate lacks the right of possession necessary for the Constitution’s homestead exemption.

 

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Tenancy by entireties is an effective, simple, and economical asset protection tool for a married Florida debtor where only one of the married spouses has creditor issues. The primary problem with T by E protection is that its effectiveness last only so long as the debtor is married to the same spouse. In the event of a divorce or the sudden death of the non-debtor spouse the remaining debtor spouse could find all his formerly T by E property exposed to creditors. I have seen severance of T by E by death or divorce expose a debtor to garnishment and levy without warning by a pre-existing judgment creditor who somehow discovered that the debtor spouse’s assets had become exposed by the end of his marriage.

The Delaware legislature enacted this year a law providing for a “tenancy by entireties trust.” (“TET”). 12 Del. C. Section 3334.  Delaware law, like Florida law, recognizes a tenancy by entireties creditor exemption for both real property and personal property (cash, stocks etc.). The tenancy by entireties trust is designed to preserve the exemption in the event the marriage ends by divorce or death. The law applies to revocable living trusts typically used in estate planning where the married couple is the trustmaker and lifetime beneficiary of the trust. A married couple contributing T by E assets to the Delaware trust may continue to withdraw trust income and principal for their living expenses. Simply stated, the Delaware statute says that if you contribute property to the TET, which property is exempt T by E property at time of contribution, the property in the TET retains its T by E character for the lifetimes of both spouses. If the asset is T by E going in, it is always T by E even if there is a death or divorce.

 

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I’ve noticed that asset protection clients often forget to consider the protection of leases. People typically do not think of a lease as an asset because the lease represents a monthly payment and a large liability. Yet, a lease is also an asset because it give your to right to use or occupy property so long as you make payments. A good lease can be quite valuable. For example, let’s say you have leased a new Mercedes for $200 a month for four years. That lease is an asset because your right to drive the Mercedes for the next four years for only $200 is a valuable right. If the lease payment were $1,000 per month then the lease would have no inherent value for most people.

Property leases are valuable regardless of amount if the leased premises is used for your business. Your right to occupy the business property, and your leasehold improvements, are valuable because the lease is required to operate the business. An astute creditor will levy upon a property lease in order to close the doors to the debtor’s business. Even thought the creditor would have to make future lease payments the attack upon the debtor’s leases pressures the debtor to pay.

Lease valuation is also important when a debtor wants to sell or transfer business assets to another business or another business owner. The value of existing business leases must be determined by appraisal and then included in the transfer price in order to defend the fair value of the business asset sale.

You can protect leases as part of an overall asset protection plan, but you must understand the economic value of leases and discuss the leases with your asset protection attorney.

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Good asset protection works. I have had a client who was involved in complex and expensive civil litigation in Washington, D.C. with a former business partner. When I first met the client he was living and working in Virginia just outside D.C. although he had some business in Miami, Florida. He and his wife were in the process of getting a divorce. His litigation opponent was aggressive, well-funded, and unwilling to significantly lower his demands in settlement.

The client bought a home in Florida for $750,000 cash with stocks and money from a previous business sale. Even though he continued to commute to Virginia to run his business he obtained a Florida driver license and forwarded all his mail to his Florida house.  He and his wife agreed to remain married so that their joint bank account was protected from the creditor as a tenants by entireties asset. The client took half the money in the joint entireties account and bought an annuity. This was not a fraudulent conversion as the money was exempt in the joint account. He took some money in his own name and invested it in his brother’ s car wash business in exchange for a minority interest in the brother’s LLC. His remaining liquid cash was deposited in a small out of state bank.  

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 The bank expects the client to pay the loan in full in a real estate market where the client cannot sell the property and cannot refinance the property with another bank because banks today are reluctant to extend new credit. The client wonders why his loan which has always been paid on time is suddenly called a "non performing" loan.

You would think that if you are current on your bank loans the bank would not want to call the loan or foreclose on the property. You would think that if you are performing your payment obligations and other requirements under a note and loan agreement that the bank would classify your loan as a "performing loan", or a good loan. That’s what you would think. But that’s not the case in today’s lending world.

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