Florida Asset Protection Law Blog | Attorney Jon Alper

People who inherit a closely held limited partnership interest can find themselves with an asset which has not been optimally designed for asset protection purposes. An attorney called me to discuss one of his client’s who  reported his inheritance of 95 percent of the limited partnership interests in a limited partnership that owned free and clear a valuable piece of property. The attorney’s client  assumed his inherited partnership asset was protected from a threatened lawsuit because the judgment creditors would be limited to a charging lien remedy against the inherited limited partnership share. His situation was not that simple.

I asked about the partnership’s general partner. The client’s parents had set up a corporation to be the general partner. The parents, and now the client, owned all the stock in the general partner corporation. I think the client has an asset protection problem with the general partner. The judgment creditor could levy upon his shares in the corporation and thereby gain ownership and control of the partnership’s general partner. The general partner decide if and when to make cash distributions which are subject to the creditor’s charging lien.

This client, a potential judgment debtor, needs to get rid of the general partner. Most partnership agreements and Florida’s partnership statutes provide a general partner the opportunity to resign; a person cannot be forced to serve as general partner. Most partnership agreements provide the limited partners a mechanism to remove the general partner without case. In my opinion, this general partner should be removed and accept the removal through voluntary resignation.

 

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Annuities are popular asset protection tools. Many of my clients suggest buying an annuity with some of their non-exempt money, and they ask me how much money they can safely put into annuities when they anticipate a lawsuit or judgment from an existing lawsuit.

The issue is fraudulent conversion. Using non-exempt money to purchase an exempt asset, the annuity, can be reversed if the purchase is intended to evade creditors. Fraudulent transfers and conversions are always “fact specific” questions. The transfer or conversion is examined under all the circumstances relevant to the transfer or conversion by the particular client.

Important factors for defending fraudulent conversion attacks against a debtor’s  annuity purchases, or his  contributions to retirement plans, are the debtor’s age and work status.. Annuities are used primarily to provide a guaranteed income stream for retirement after accumulation of tax deferred income. An older debtor with no employment or current business income has legitimate reasons for annuities other than for asset protection. These financial planning benefits for such client make it easier to fend off fraudulent conversion challenges.

 

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Your judgment creditor cannot levy upon a car which you lease because you do not have title to the car. True, most of the time. One of my asset protection clients of my clients stated this past week  that his personal car was not at risk to his creditors because he had leased the car for four years and pre-paid the entire lease. I think the client’s judgment creditor is unlikely to pursue this car after the client declares that it is a leased vehicle. Technically, the creditor could attack this car.

A lease can be an asset. I’ve stated before on this blog that while most people consider leases such as real estate rentals and car leases to be liabilities because of their payment obligation a lease is also an asset. A lease gives the lessee a right to property during the lease term subject to making lease payments. This client had acquired the right to drive his car for four years with no lease payments because he pre-paid the lease. I think a judgment creditor could levy upon the client’s fully paid lease. Someone would pay the creditor money for the right to drive the debtor’s car for the next four years.

A pre-paid car lease is an asset subject to levy; better to pay monthly lease payments or buy a car subject to a lender’s lien.
 

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Concerned debtors sometimes ask me if their judgment creditors can come into their home and take all their furniture and other stuff.  Debtors and prospective debtors are not going to like this answer: Yes they can.

Florida courts have permitted creditors to go through a debtor’s home and inspect their belongings for the purpose of organizing a sheriff’s levy on the debtor’s things. To make things more scary, there is a case which permits the creditor have the sheriff break into the house by force with a “break order” ex-parte, meaning without notice. Of course, the debtor can assert exemptions, including in the case of a married debtor, the tenants by entireties exemption. However, in the case of husband and wife joint judgment debtors there is authority for break orders without notice into the debtor’s homestead to levy upon the joint debtor’s things.

I’ve talked with creditor attorneys who occasionally use break orders to attack joint marital debtors or unmarried single debtors. The creditor attorneys use this tactic primarily for intimidation purposes. No creditor expects to recover significant money from the sheriff’s public sale of a debtor’s used furniture.

 

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LLCs provide better asset protection of the owners’ interest than do corporations. Many asset protection plans involve changing a clients’ existing Subchapter S corporations to an LLC taxable as an S corp. There are two ways to do this. One way is to create a new LLC and then file articles of conversion which turn the corporation into the new LLC. The corporation turns into an LLC and all corporation assets automatically transfer to the LLC The other way is to merge the corporation into an existing LLC which already has assets. When the corporation has assets with built-in appreciation the there is an income tax issue with this plan. The issue is whether the change to the corporation accelerates income tax.

This past week one of my clients was considering whether he wanted to convert a corporation to a new LLC or merge the same corporation with an existing LLC. He asked me whether the IRS treats the merger and conversion differently with respect to taxation of built in appreciation in corporation assets. As I am not a tax attorney I had to reach out for the answer.

 

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Sometimes people who owe large amounts of debt to mortgage lenders, commercial banks, and credit card companies also owe money to family members. These debtors have borrowed significant amounts of money from family, or in some cases good friends, in their attempt to pay their monthly payments and avoid default and lawsuits. Some of these debtors have maintained valuable assets free and clear of any lender security interests. Some debtors own free and clear real property; others have significant securities accounts which are vulnerable to a judgment creditor.

 I often meet with clients who suggest that they transfer free and clear assets to family creditors in repayment of the loan. This preferential repayment of the family accomplishes two goals. The repayment transfers a non-exempt vulnerable asset out of the debtor’s name and also repays the family member to whom the debtor feels a moral obligation to pay back before exposing non-exempt assets to general judgment creditors.

 

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One of my clients was very concerned about the exemption of 529 plans in Florida. The client’s financial planning involved significant contributions of money each year into 529 plans for his young children. The client established the plans in Illinois where he and his wife had lived before moving to Florida. The 529 plan was sponsored by the State of Illinois. The client had read that Florida law exempts only plans sponsored by the State of Florida. He wanted to know if he had to transfer his Illinois 529 plan to the Florida plan to preserve its protection.

Let’s look at the Statute. Florida Statute 222.22(1) exempts from attachment, levy, garnishment or legal process moneys paid into or out of, ... and the income of any validly existing tuition program under Section 529 of the Internal Revenue Code “including, but not limited to,” the Florida Prepaid College Trust Fund. In other words, any college tuition program authorized by the tax code is exempt for Florida residents. It seems the statute is clear, so what did the client read that made him uncertain. What he read was the old statute. Prior to 2005 the statute exempted, “moneys paid into or out of the Florida Prepaid College Trust Fund.” The prior statute did not reference Section 529 of the tax code and did not exempt any 529 plans other than the Florida plan. Today, all qualifying 529 plans are exempt for Florida residents.
 

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Asset protection planning does not protect against IRS debt. Nevertheless, clients sometimes ask me how long the IRS has to assess additional tax and to collect unpaid taxes. I saw a good summary of the topic on a post written on a well-known tax blog called Taxgirl. The blog is published by Kelly Phillips Erb and is an excellent source of tax information. All I know about IRS's collection of past due tax debt is what I read on Taxgirl.

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