Florida Asset Protection Law Blog | Attorney Jon Alper

Florida law has a well-established tradition of protecting a beneficiary’s interest in a discretionary  spendthrift trust. A “spendthrift trust” is an trust established for the benefit of another person, the beneficiary, which trust includes a provision that prohibits the beneficiary from voluntarily or involuntarily assigning his interest to a third party including the beneficiary’s creditors. The spendthrift trust is “discretionary” if the trustee of the trust is given the discretion over the timing and amount of distributions he makes to the trust beneficiaries.

One of my clients is the beneficiary of a spendthrift trust established by his parents for the benefit of my client. There are no other beneficiaries. The parents named my client as the trustee of the trust created for his benefits. The trust gives the trustee, the client, discretion over the amount and timing of distributions.

The client has a potential legal problem. He wants to know if his beneficiary interest in his parents’ spendthrift trust is protected from this future creditors even when the client is serving both as the trustee and the sole beneficiary. The client is concerned that his future creditors could ask a court to force my client to exercise his power as trustee to make distributions of trust assets to himself and that the assets could be levied upon once he receives the assets outside of the trust. In other words, does spendthrift protection still apply when the debtor is both beneficiary and discretionary trustee of the trust.

 

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Asset protection can be very complicated when  a husband and wife reside apart in different states. Here is an interesting tenants by entireties issues presented recently by a new client.

Husband and wife lived in Ohio where they had joint bank accounts. The husband’s employer transferred his job to Florida. The wife has a job in Ohio. The husband moved to Florida, purchased a condo, and moved into the condo as his primary residence. He obtained a Florida drivers license and took other steps to establish Florida residency. The husband and wife opened a joint bank account in Florida.

The wife was sued in Ohio on her personal guarantee of a loan made to her Ohio business. They want to know if the money in the joint Florida account is exempt from the wife’s separate creditors.

 

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Don’t get snookered by a short sale. A client called me for asset protection advice. His legal problems relates to a completed short sale. The bank approved the short sale if the client signed a promissory note to pay the bank the amount the bank the deficiency between the mortgage balance and the short sale price. The bank representative assured the client that the bank rarely pursues collection of the note.

Four months after the short sale the bank sold the “short sale note” to an investor. The investor probably paid very little for the note. The investor has demanded the not be paid in full. The investor hired a collection agency to pressure the client to pay the note. The collection agent told the client that their only concession would be to give the client 10 years to pay the short sale note in monthly installments. Now, the client is very worried that the investor will sue him to accelerate the short sale note and convert the note to a judgment.

 

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When you file an LLC in Florida you have to name the person who is serving as manager and indicate if the manager is also an LLC member. I often get asked by clients and blog readers  if there is a benefit to form an LLC in states which do not publish either the owner or managers on the state’s website. You can form an LLC in Delaware, Nevada, Wyoming, and maybe other states without naming the manager or LLC owners. Also, public access to these other  states’ website is more limited than Florida’s website.

 Some people see a “secrecy” advantage in creating LLCs in these states. They believe that their creditors will likely search the public records of Florida and other states to see if the debtor owns or is associated with an LLC formed in these states. If the creditors do not find any business entities associated with the debtor’s name in the public record, the creditors will be less likely to pursue aggressive collection of the debtor-according to the secrecy theory.

In my opinion, this is hogwash. I don’t think creditors search public records in order to decide whether and how aggressively to collect judgment debts. Also, there is no secrecy in debt collection or in asset protection (other than perjury).  Within 45 days after a civil judgment is signed the debtor is usually  required to send the creditor a financial affidavit which lists all of the debtor’s assets. When a creditor takes the debtor’s deposition in aid of execution of the judgment the creditor will ask the debtor to describe his interest in any LLC, partnership, or other business entity. In the course of the creditor’s discovery procedures the debtor’s business  interests will be disclosed and the secrecy advantage of forming the LLC in another state will be lost.

 

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Sometimes a debtor’s family wants to help out by paying off one or more of the debtor’s obligations. One of my clients stated that he owns a relatively small home subject to two mortgages. The first mortgage is payable to a private party from whom he purchased the home. The second mortgage is payable to a bank. The client cannot afford both mortgages because his business has been generating less income. The client’s brother wants to help him by paying off the first mortgage to the private seller.

I told him that he would be in better position legally if his brother bought the first mortgage note rather than paying it off. His brother would have the ability to foreclose the acquired first mortgage and strip off the junior second mortgage. Although the client would still be personally liable to the second mortgage, he would be in a much better negotiating position with the second lender to modify or discount the second mortgage.  Mortgage lenders are more likely to discount the payoff amount if they believe the purchaser is a third party investor not related to the debtor. Set up a legal entity, such as an LLC or corporation, to serve as the prospective debt purchaser.

In general, people who want to assist family member debtors with their mortgage debt should consider buying debt and mortgage rather than paying off the  debt. The purchased security interest can be used to shield the debtor against junior or future incurred debts.
 

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An attorney caller said that he represents the beneficiary of an irrevocable testamentary trust established by the client’s deceased father. The father’s  trust says that after his death the assets in his trust shall be used to support his surviving wife, and that upon her death, the money remaining in the trust shall be distributed immediately to the client and his sister in equal shares. The wife is trustee of the trust established for her benefit.   The father's trust document has a spendthrift provision which protects the children’s future rights to trust assets.

The attorney’s clients has a civil judgment entered against him. When the trust assets are distributed to the child after his mother’s death the spendthrift provision will no longer protect the money from the client’s creditors. The attorney wants to know how to protect the client’s inheritance.

Here is one suggestion. Half of the trust assets will be distributed to the debtor/client and half to his sister. The mother as trustee of the  trust can use all trust assets now  to purchase an annuity for her own benefit during her lifetime. The mother can name the debtor and his sister as equal contingent beneficiaries of the annuity.  Upon the mother’s death the annuity would be distributed equally to the children. Neither child will inherit from the trust any assets other than the annuity.  The annuity and proceeds would be exempt from the debtor’s creditors. This is not a reversible fraudulent conversion because the mother, not the debtor, is using her trust assets to buy the annuity. This plan assumes that the mother will agree to use the liquid trust assets to purchase an annuity contract.
 

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Prior to 2011,  when the estate tax exemption was much lower,  most estate planning attorneys preferred to separate spouses’ assets in separate trust to make sure each spouse received their full estate tax exemption. Joint trusts which are not properly drafted or maintained can forfeit one or the other spouse’s exemption. The increase of the estate tax exemption to $5.0 million per person, $10.0 million per couple, has made joint living trusts more feasible estate planning tool. Even if just one spouse gets an exemption, most families today, after the recession, have taxable estates less than the single exemption of $5.0 million.

If  more couples’ estate plans will use joint living trusts the issues for asset protection is whether a married couple can retain tenants by entireties protection after transferring an asset to a joint living trust. Tenants by entireties requires ownership by married persons; a trust is a contract relationship and not a person. A creditor surely can argue that transfer of a jointly owned asset to a trust destroys one or more of the tenants by entireties legal requirements.

I have always cautioned married couples with asset protection issues for one of the two spouses  against putting entireties property into an estate planning living trust. I suggested that the married couple retain joint ownership in their personal names and then disclaim the inheritance by survivorship upon the first death so that the asset can pass to the living trust by disclaimer. There are, however, several technical requirements for proper use of disclaimers.

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