Florida Asset Protection Law Blog | Attorney Jon Alper

Several states have enacted statutes which provide asset protection of a debtor’s interest in a trust which the debtor sets up for his own benefit and which the debtor capitalizes with  his own non-exempt assets. These trusts are referred to as “domestic asset protection trusts” (DAPT). The trusts legislation attempts to create domestic trust with the same asset protection benefits of offshore asset protection trusts.

Many of my asset protection clients suggest using a DAPT as part of their asset protection program. Whether a DAPT is an effective asset protection tool depends mostly upon where the debtor lives and owns assets. Here is a good summary of DAPT options from Jay Adkisson’s asset protection blog published in Forbes Magazine. Jay provides an easy to understand chart which illustrates when a DAPT will, and will not, work, and he provides also legal citations for the application of DAPT law in different forums.

Jay’s chart shows why DAPT created in other states usually will not protect assets of Florida debtors in Florida courts.
 

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I typically do not advise my clients to rely on onshore trust for asset protection, especially when a client is considering bankruptcy. Bankruptcy courts have worldwide jurisdiction over all the debtor’s assets, and here is precedent supporting the authority of bankruptcy courts to pursue trust assets moved outside the U.S.

Simply stated, offshore trust promise asset protection because the settlor appoints a trustee located beyond the jurisdiction of U.S. courts. If a bankruptcy court would order a debtor to bring back the trust assets or face contempt the debtor, in theory, would show that he is unable to comply with the court order because he has no control over the trust assets.

Without offshore trust planning, things usually do not go according to plan, especially in bankruptcy courts. A recent offshore trust failure occurred in a central Florida bankruptcy case. A bankruptcy judge directed a debtor to repatriate all money in his offshore trust and freeze trust accounts. The court found that the trust agreement gave the debtor power to control the trust or the trustee, and therefore, the debtor could do what was necessary to bring back the money.

 

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I have written many blog posts over the years including reasons why wealthy debtors should avoid bankruptcy. I read about recent case where a bankruptcy court penetrated a domestic asset protection trust which would have been fully protected in a state court collection proceeding.

In this instance, a debtor established a self-settled Alaskan trust in 2005 for the benefit of himself and his family. Alaska has statutes providing that self-settled trusts,  so-called domestic asset protection trusts, are protected from the settlor’s creditors. In fact, Alaska was the first state to enact DAPT legislation. In this case,  the debtor incurred over $200,000 of credit card debt after he transferred property to his trust in 2005. He filed bankruptcy in 2009 to discharge the credit card debts. The bankruptcy trustee sued to include the Alaskan trust as part of the bankruptcy estate.

Under Florida law, and the law of most states, there is a four year statute of limitation applied to fraudulent transfer claims. A creditor could not bring a fraudulent transfer action in 2009 seeking to reverse a transfer to an Alaskan trust created and funded in 2005. Generally speaking, the four year limitations applies to most transfers in bankruptcy cases where the trustee brings the action under the applicable state law.

 

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Bank of America may pay you cash to short sale your house. The payment is an element of BOA’s pilot program to encourage short sales called their “Cooperative Short Sale Program. Bank of American is working with selected real estate brokers to solicit eligible homeowners with BOA mortgages. BOA solicits selected homeowners for the short sale promotion and incentive. You cannot apply; you have to be asked.

I know the owner of a Remax franchise in Orlando who is one of the brokers BOA is using to approach eligible homeowners and to list their homes for sale. He states that BOA’s cash incentives to homeowners are in the range of $10,000 to $20,000.

Homeowners must demonstrate financial hardship and inability to afford payments. Obviously, the homeowner must cooperate with sales efforts, pay currently all home expenses, and maintain the house in good condition. Upon completion of the short sale BOA will waive deficiency judgments and report to the credit bureaus that the mortgage was resolved in a short sale.

I have written several times in prior post about attorneys and “mortgage experts” who pronounced dire predictions about mortgage lenders eventually getting tough with borrowers. I have heard scary predictions in private communications, and I have read the predictions in national publications.

The BOA program is evidence that mortgage lenders do not intend to wage war against defaulting borrowers, and instead, they may have decided it is in their best interest to seek homeowner’s cooperation to liquidate real estate at the highest price with the least expenses and delays. The Cooperative Short Sale program illustrates a significant change in mortgage company policies toward delinquent homeowners

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Institutional lenders understand well Florida’s tenants by entireties protections, and they understand that they may not be able to enforce promissory notes against a married borrower unless the note is signed by both the borrower and his spouse. For this reason, most lenders will insist on joint signatures to loans or guarantees of business loans where a single spouse is the primary loan applicant. A common example is a husband who runs and owns a business applies for a commercial loan, and the bank approves the loan conditional upon the wife co-signing a guarantee even though the wife has nothing to do with the business and has no independent income.

A recent Florida appellate case held that banks’s demand joint signatures on loans or guarantees may be illegal when the loan is adequately supported by the applicant spouse’s income and credit score. The court suggested that a bank’s request for the spouse’s signature when the bank is simply trying to defeat entireties ownership may be in violation of the Equal Credit Opportunity Act, 15. U.S.C 1691.

 

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Physician and attorney practices through corporations or LLCs can be owned only by licensed professionals. Therefore, the professional cannot own his business in most cases jointly with his spouse who is not also licensed in the same profession. Profit distributions from the professional practice are paid to the professional spouse who owns the business. These distributions are non-exempt money in the hands of the professional.

Most professionals and their  spouse maintain joint financial accounts in order to achieve tenants by entireties protection of their personal money from potential creditors or claims against the professional related to his professional practice. When the professional deposits non-exempt distributions from his business in to his joint personal account the professional is depositing non-exempt money into an exempt entireties account. Is this deposit a fraudulent conversion of a non-exempt asset to an exempt account?

Most courts do not consider this common practice to be a fraudulent conversion. Fraudulent transfer law considers the context of debtors’ transfers. In cases where the debtor has established a practice of depositing profit distributions in to a joint account during a long-term marriage, continuation of the practice does not become fraudulent just because a judgment is entered. The answer is different if the debtor changed his personal financial arrangements when a claim arose or moved money secretly.

Fraudulent transfers and conversions depend on circumstantial evidence of the debtor’s intent. Maintaining financial arrangements established long before a legal problem arose, by itself, is usually not evidence of intent to evade creditor collection.

 

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