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

An attorney sent me an email question about his client’s possible interest in an irrevocable trust. The client apparently set up the irrevocable trust for the benefit of other family members. He transferred assets irrevocably to fund the trust. The trust was established to “freeze” the value of the trust assets for estate tax planning. The grantor transferred $5 million in to the trust.

The trust agreement provided for an independent trust protector, that is someone who has no beneficial interest under the trust. The trust protector has the discretion to appoint (i.e, give away) trust assets to a defined group of people including the grantor himself. The issue is whether a future creditor of the grantor could levy upon the grantor’s right to receive trust property through appointment by the independent trustee.

 

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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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Interesting question from another attorney. The attorney had a client who wanted to form a business entity to hold a valuable piece of unencumbered real estate. The client and attorney are concerned about using a limited liability company, single or multi-member, because of the Ohmstead decision that jeopardizes LLC asset protection. The attorney and client are considering either a limited partnership (LP) with a LLC as the general partner or a limited liability limited partnership (LLLP) with the client acting individually as the general partner. The attorney is not concerned about a creditor attacking the client’s limited partnership share, but he is worried about the creditor trying to levy upon the general partnership interest. The concern is that the general partner owns one percent of the equity and that the general partner controls partnership decisions and management.

I don’t’ see a significant difference between the two options in terms of protecting the client’s general partnership interests if a creditor sues the partnership. An LLLP protects the general partner from personal liability for the partnership’s debts, and if the LP is used, the LLC entity, even a single member LLC, would act as a corporate shield against individual exposure to suits against the partnership.

 

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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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A few days ago an attorney submitted an interesting question about creditor remedies against general partnership interests. As background, a general partnership is an equal partnership among two or more joint venturers as opposed to a limited partnership which consist of a general partner/manager and limited partner/investors. Florida law permits a creditor to foreclose the interest of a partner in a general partnership. Florida law states that a charging lien is the exclusive creditor remedy against limited partnership interests. The question is whether a creditor can foreclose the interest of a general partner of a limited partnership. In other words, is the creditor remedy determined by the type of interest or the type of partnership?

I’ve come across this question previously. I could not find any Florida court decisions on this issue last time I looked. In my opinion, a creditor cannot foreclose the partnership interest of the general partner in a limited partnership. The reason is that the relevant statutes restrict creditors to a charging lien against the interest of a "partner" in a limited partnership and permit foreclosure of "a partners" interest in a general partnership. The limited partnership creditor section does not distinguish general and limited partnership interest when it makes charging liens the exclusive remedy.

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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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Florida debtors who are head of household can exempt from creditor garnishment unlimited earnings. Questions frequently arise concerning what types of compensation are included in the statute’s definition of "earnings." For example, commissions earned by an independent contractor are not exempt under the Florida statute. Florida courts have held that wage garnishment protection applies to regular compensation dictated by the terms of an arms’s length employment agreement to perform services that are in the nature of a job.

A Florida bankruptcy court considered whether tips earned by a head of household bartender are in the nature of earnings protected from garnishment. The debtor claimed as exempt wages and tips in a bank account. In this case the debtor’s employer charged all customer’s a flat service charge upon all of the debtor’s sales, and the employer paid the service charges as part of the debtor’s paycheck. The bankruptcy court held that the tip payments were exempt after deposit in the debtor’s account. The court noted that the tips were paid as par of a regular bi-weekly paycheck and that there was no allegation that the tips could not be properly traced and identified as earnings of a head of household. In re Holmes, Case No. 09-16564, Southern District of Florida.

The court did not address the issue of cash tips paid directly from customers. As a practical matter, a creditor could never garnish a cash tip before it is paid and most servers do not deposit cash tips in their bank account.

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