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

Owning real estate or securities in a multi-member LLC has asset protection benefits by virtue of limited creditor remedies to attack your membership interest. What about owning personal automobiles, furniture, artwork, and other personal property in an LLC? Clients often suggest to me that they titled their household effects and cars in an LLC to keep the assets away from potential creditors.

 I usually do not recommend ownership of personal property in an LLC because I do not think it will be effective protection. The issue is a “reverse piercing” of the LLC. LLCs, corporations, and other legal entities used for personal consumption and personal needs can be considered an extension, or alter-ego, of the individual owner. Furniture, cars, and other property used personally on a daily basis should be considered as personal assets and not the property of a separate entity.

If a debtor uses an LLC for personal uses a court likely will consider the LLC assets the debtor’s personal assets and make the assets subject to execution; the creditor should not be restricted to a charging lien against LLC interests on an alter-ego LLC.

Insurance is another issue. Some property insurers will charge higher rates to insure assets owned in the name of a business entity.
 

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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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Many people seeking asset protection of their personal assets are self-employed and support themselves with salary and distributions from their own business Many of these self-employed individuals have concluded that their business cannot survive and are resigned to winding down and closing their business.  The owner is concerned about personal liability because he and or his spouse personally guaranteed business debt.

A very common question is whether the business owner can pay himself from the business even though his business will not be able to pay his creditors. I have seen recently several court cases dealing with debtors who paid themselves salary and distributions from a failing business. In my opinion the general answer is one of common sense.

A business owner may pay himself a reasonable salary for operating his business even though his business is in financial difficulty and may not pay business debts. The salary must be reasonable and comparable what the business would pay an unrelated employee for the same work. You cannot increase salary to deplete the business bank account prior closing the business and defaulting on  business debt.  The business owner should consider decreasing his personal compensation as business revenues decline to show good faith toward his creditors..

Unfortunately, many business owners give into the impulse to grab all the money they can for themselves before the business closes. I find that some times the motive is greed, and some times the motive is financial survival after the business revenue flow stops. Whatever the explanation, if you drain money from your insolvent business you may cause recipients of the money to become defendants in fraudulent transfer lawsuits and you may jeopardize your ability to discharge personal debts in bankruptcy should bankruptcy become necessary.

 

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Sometimes there is no alternative to  a single member LLC, or you just can’t find anyone you trust to be a second member in your business. One example is where a husband and wife establish a LLC owned as tenants by entireties which I believe would be considered a single member LLC (although there is no case on the issue). The LLC may have worked well for some time  to protect the LLC interests against the creditors of one spouse, but now the owners unexpectedly confront a joint creditor, and find it difficult to include another member. Is there anything a single member LLC can do to achieve some asset protection.

What about reorganizing the LLC in a state such as Delaware or Wyoming with statutes that protect single member LLCs from creditors because the state law provides the charging lien is the exclusive creditor remedy to attack all LLCs regardless of number of members. I’ve stated previously on this blog that I do not think a Florida court would apply the foreign state’s LLC statute when considering the collection remedies of a Florida creditor against a Florida debtor. I don’t think moving your LLC out of state will work.

Last month I spoke at the Florida Bar’s annual asset protection seminar in Ft. Lauderdale. One of the other speakers, attorney Alan Gassman, suggested a way for a single member LLC to protect itself from its owner’s creditors. Alan said that he writes LLC agreements which appoint the initial manager permanently and state that the members cannot vote to remove and replace the manager. If a creditor or the creditor’s assignee becomes a substitute member he would own an interest in an LLC managed by the initial manager appointed by the debtor. In most cases, the debtor himself would be the permanent  manager.

 

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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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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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I have lost count of the number of asset protection inquiries about land trust where the prospective clients believe that the land trust is an asset protection tool. Land trusts provide no asset protection benefits. A land trust is a self-settled trust, meaning the debtor is the trustmaker and beneficiary. A living trust used for estate planning is another type of self-settled trust. In the case of a living trust the trustmaker/beneficiary is usually also the trustee. The trustmaker is never the beneficiary of a land trust.

A land trust is used to hide ownership of real property. People use land trusts for privacy and confidentiality. If you purchase property in the name of a land trust the recorded deed will list the name of the trustee (not you) and the property description. The deed and public record will not list the names of the trust beneficiary.

Privacy does not work in asset protection. Your judgment creditor will ask you to disclose under oath all of your legal or beneficial interests in real property. A debtor will have to disclose his beneficial interest in a land trust. Also, if the property owned by the land trust is investment property your federal tax return, discoverable by your judgment creditor, will likely reveal taxable losses or gains related to your ownership interests.

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Asset protection is not about hiding assets; there is no secrecy in asset protection. I have made this comment many times previously on this blog. Debtor’s who don’t understand this principal can get themselves into serious trouble during the post-judgment discovery process when the judgment creditor examines the debtor and inspects the debtor’s financial documents in their attempt to find non-exempt assets. Since there should be nothing to hide, answer the debtor’s questions and don’t intentionally obstruct the creditor’s discovery process. In other words, “don’t play games.” Evading the creditor’s questions and providing incomplete documents makes it look like you are hiding assets even if you really have no reason to hide assets.

I have seen several debtors get themselves into trouble with a judge because the judge felt the debtor was evading a creditor’s discovery of assets. If a judge believes you are not fully and truthfully responding to asset discovery you will lose credibility.(judge won’t like you). In the worst cases, a judge can hold a non-cooperative debtor in contempt- I”ve seen it happen. If a judge forms a bad opinion about your truthfulness and lack of good faith in the judicial process you will be at a significant disadvantage when your attorneys appears in court to defend your asset protection planning. I have had several clients who were forced to make large debt settlements because their creditors seemed to have convinced the judge they were hiding assets only because the debtor fought and resisted reasonable post-judgment discovery.

 

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Asset protection planning requires knowledge of many different areas of the law. The multi-disciplinary nature of asset protection is what makes it difficult and why relatively few attorneys have the breadth of experience to practice competently in this field. Today, I encountered another example. One of my asset protection clients owed substantial money to a former business partner. The client owned a private corporation with significant value. He had signed a promissory note to his former partner and they had a security agreement pledging the stock in his corporation as collateral. The client was concerned that neither he nor his former partner ever filed a UCC-1 on the public record which he thought necessary to perfect his partner’s interest against subsequent judgment creditors. The client wanted to pledge the stock to secure his relatively friendly former partner and protect the stock against adverse judgment creditors.

I explained that the former partner’s security may have priority against all future creditors even though there was no UCC-1 filed. Generally speaking, a lender’s security in real estate is perfected by recording a mortgage. A lender’s security in personal property is perfected by filing a UCC-1. But, UCC-1 forms are not required to perfect security interests in all types of personal property. Security perfection in personal property is governed by the Uniform Commercial Code as adopted in the Florida Statutes. The Code and Statutes provide that a lender perfects security priority in corporation stock by possession of the original stock certificates. A UCC-1 is not required. If this client had   given his former partner the stock certificates at the same time he executed the note and security agreement the former partner’s priority against this stock would date back to the date of the note.

If you seek to protect non-exempt personal property by pledging the property to a bona fide preferred creditor make sure you research the proper procedures to perfect the security interest.
 

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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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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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People are trying to find a way to protect single member LLCs after the Florida Supreme Court said that creditors can levy or foreclose a debtor’s single member LLC interest. I frequently hear questions from clients and from emails sent by blog readers about forming a single member LLC in states such as Wyoming or Nevada whose laws restrict creditors to charging liens against single member as well as multi-member LLCs.

 I’ve stated previously on this blog my opinion that courts enforcing a Florida judgment against a Florida debtor’s single member LLC would apply Florida law (charging lien not exclusive remedy) rather than the law of the foreign state where the LLC was formed. I still have no knowledge of any judicial ruling on this issue. Not surprising, since the question became important only this past summer when the Florida court drew the distinction between the asset protection of single and multi member LLCs.

 

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The Florida Supreme Court decision this summer which removed charging lien protection for single member LLCs has caused business owners and their attorneys to search for ways to make sure their LLCs have more than one member. When only one person has invested money in a business it is difficult to turn that same LLC into a multi-member entity. One possibility is for the current owner to sell a portion of his LLC to a third party for reasonable value. The sale would have to withstand creditor challenge of the sale price and whether the sale is really “arms length.” A second possible plan is for the LLC membership interest to be divided into voting interests and non-voting interest, and for the owner to invite a third party to join the LLC as a voting member. The debtor would retain all the financial interest, but important LLC actions would require the consent of the new voting member.

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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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Word of the Florida Supreme Court LLC decision in the Ohmstead case is gradually spreading through the legal community. This is the decision that expressly deprived single member Florida LLCs most asset protection benefits because said creditors are not limited to the restrictive charging lien remedy against debtor’s single member LLC interests. Creditors can use all available remedies including levy and foreclosure of LLC interest in single member LLCs and possibly interests in multi-member LLCs as well. Single member LLC owners have been contacting me and other asset protection attorneys asking what they can do to protect their single member LLC interest. Attorneys have been conferring among themselves looking for alternatives.

What we know now, with certainty, there are several ideas but there is no answer. It will take years before an appellate court will evaluate anyone’s proposed single member LLC fix or alternative.

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An attorney emailed me with a question about a prospective bankruptcy client who is in the real estate sales business. The real estate salesman has a few contracts in the pipeline- sales contracts are signed subject to financing contingency and other conditions. If the sales close the realtor will earn a commissions. The question is whether the salesman has to value and report these future earnings on a Chapter 7 bankruptcy petition either as an asset or as income. The attorney wonders whether the debtor should discount the present value of the future commissions based on their probability and timing.

There have been many blog posts dealing with tenancy by entireties bank accounts. I have often explained that accounts opened by married couples as joint tenants with rights of survivorship are presumed to be owned tenants by entireties under Florida law. I advise clients to open accounts specifically titled as tenants by entireties so they don't have to rely on the legal presumption that creditors can overcome and rebut under some circumstances. There is nothing to rebut or overcome if the account is titled as an entireties accounts.

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I have recently posted blog articles about a client who is trying to protect money from a judgment creditor by overpaying estimated taxes to the IRS, and when a refund is due from the next tax return, asking the IRS to hold his refund to pay future taxes. I had mentioned that an experienced collection attorney I consulted had no idea how he could attack a debtor's excess tax deposits with the IRS. Another collection attorney in Florida emailed his suggestion that the creditor could seek proceedings supplementary with a Florida court and ask the judge to use the broad equitable powers granted courts by the relevant statute to command the IRS to turn over the debtor's tax deposits to the court. A bankruptcy professor did not know the answer and suggested speaking with a tax attorney, which I did.

This week I presented to issue to Mr. Robert Kramer who is a very experienced and well known tax attorney in Broward County, Florida, where he heads his own firm, Kramer, Green, Zuckerman et. al. Robert Kramer has been a tax attorney for several decades and has also provided asset protection planning for many physician clients. Robert said that a general judgment creditor cannot garnish the IRS to collect a civil judgment in the absences of specific statutory authority; such authority exists, for example, for collection of state child support awards. Also, Robert stated that a state court judge cannot enforce an order against the IRS for turnover of taxpayer money to collect a civil judgment because the state court judge lacks federal jurisdiction, and there are no federal statutes giving such power to state courts to collect general civil judgments. In other words, the Florida judgment creditor may have no remedy to get money the debtor transfers to the IRS to avoid his creditors.

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Often new clients describe asset protection tools they implemented before they first meet me. Their asset protection solutions are usually based on a book they read, a seminar they attended, or even things they read on my own website. Usually, the client's asset protection strategies will not work because they lack knowledge or experience with important issues, but sometimes I meet people whose own asset protection plan includes creative and possibly effective strategies. As an example, last week a new client described to me how he has already protected approximately $75,000 of cash by overpaying his estimated tax payments. His IRS account showed a positive and refundable balance of $75,000. The client assumed his creditors could neither discovery nor recover his money held by the IRS. At first, I told the client his plan would not work because his credit with the IRS was a non-exempt asset and would have to be disclosed. But upon further investigation, his ploy may be effective.

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Some businesses try to limit negligence lawsuits associated with their services or products by having customers sign agreements with "exculpatory clauses." An exculpatory clause denies or limits the customer's right to sue the business for the business' own negligence. These clauses may influence some potential litigants to drop potential legal actions, but business owners should not rely fully on exculpatory clauses. Florida courts have viewed exculpatory clauses with suspicion and as being contrary to public policy. Courts have stated that they will consider exculpatory provisions only to the extent that their appeared to be a clear intention of both parties to relieve one party from liability and where the exculpatory language was clear and unequivocal. Also, exculpatory clauses can never insulate a business from willful, malicious or grossly negligent conduct which injures another person.

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Most parents want to keep their estate planning simple. The simple estate plan is not the best plan when your children are vulnerable to lawsuits. If a parent dies leaving money to his children outright and one of the children has an outstanding civil judgment at the time of the parent's death, the child's creditors can seize the inheritance to satisfy the judgment. If the child puts the inheritance in a joint account with his spouse in an attempt to protect the money under the tenants by entireties exemption the creditor in most cases can reverse the conveyance as a fraudulent transfer placing the inheritance back in the child's own name where it could be used to satisfy the judgment. Few parents anticipate their hard-earned estate going to a creditor of one of their children. Proper estate planning protects your money not only from your own creditors during your lifetime but also from unknown future creditors of your children.

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People facing possible judgments that jeopardize their wealth are often in desperate situations; desperate people sometimes do desperate things to protect themselves. When people consult attorneys about asset protection they sometimes find that they do not have available the best legal documents to substantiate exempt ownership or to protect their business LLC or corporations. Later, the client reports that the correct documents have "been found" in their business or personal papers. Sometimes existing documents are actually found, but sometimes non-existing documents are manufactured and back-dated. I heard of a case this week where a "found" document lead to severe adverse consequences in litigation.

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At least once a day someone calls me about problems they face paying one or mortgages on their Florida real estate. Many people ask if I could assist them, or at least advise them, in negotiating a work out agreement with their lenders. They assume their lenders will realize that it is better for the lender to adjust their mortgage payment schedule than to force the borrower into foreclosure. The unfortunate fact is that as a practical matter very few lenders will work out customized deal with mortgage borrowers. Some lenders will accept short sales for borrowers already in default, but otherwise, most lenders will not deal with borrowers individual financial situations and modification requests. The main reason for lender inflexibility was expressed in a Wall Street Journal article written by economist Martin Feldstein

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I saw an email about income tax liability associated with foreclosure or bankruptcy sent by attorney Larry Heinkel. The email addresses income tax liability from the foreclosure of properties which have previously been depreciated for tax purposes. Most people know that if a bank forgives part of a mortgage loan in the course of a short sale or deed in lieu that the amount of debt forgiveness may be taxable if the mortgaged property is an investment or second home. A new law has eliminated debt forgiveness tax for principal residences. A person who is insolvent at time of short sale or deed in lieu, or who files bankruptcy, has no liability for debt forgiveness taxation. Mr. Heinkel points out a different tax trap.

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A real estate attorney alerted me to pitfalls in changing legal title to real property in the course of asset protection planning. To better protect real property from future creditors, many clients have told me that they have conveyed real estate that they purchased in their individual names to limited liability companies, corporations, or partnerships. Most often, people use quit claim deeds to make the conveyance. If a creditor records a certified copy of judgment against an individual that judgment becomes a lien on all real property titled in the debtor's individual name. The conveyance to another legal entity protects against the immediate lien on the real property, subject to any creditor argument of fraudulent conveyance. In general, such conveyance to entities from individual names is a good asset protection strategy. Yet, this attorney told me there are risks.

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Valuable personal property owned free and clear is difficult to protect from creditors. Consider, for example, my client who owned outright a private airplane. The client was unmarried and owned all assets in his individual name. The client had imminent legal problems so that any transfer of the airplane title would probably be deemed a fraudulent conveyance. One option was for the client to pledge the airplane for a bank loan. That option had two problems. First, my client did not have good credit and a loan secured by the airplane alone would be difficult and expensive. Secondly, he did not want to pay interest on a personal property loan and he had no place to shelter the loan proceeds if he did get the loan.

His main asset protection tool was to be the purchase of a new homestead and getting a home equity line of credit to borrow money for living expenses.

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Many investors in assets such as rental real estate or small operating business buy their investments or run their businesses though a limited liability company because unlike shares of corporation, the owners membership interest in an LLC cannot be levied upon by judgment creditors. The judgment creditors' remedy is limited to a charging lien against distributions of cash, if any, that the LLC makes to its owners. I met with some people today who asked questions about the benefits of an LLC which questions indicated common misunderstandings about the LLC's asset protection benefits. I'll address each of the points raised by my client about he and some partners owning rental real estate in an LLC with several owners.

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Many people who invested in real estate at the end of the boom are in financial trouble. I have been getting more and more inquiries from individual investors facing foreclosures of their investment properties. Often, people tell me they are discussing "short sales" with their mortgage lenders. In a short sale, the lender allows the house to be sold for less than the mortgage balance. The borrower avoids a deficiency judgment. The lenders would rather get most of their mortgage through a sale arranged by the owner then take the property back at a foreclosure sale. Borrower should beware of short sales.

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I've warned many times on this Blog that a court's asset freeze can stop asset protection planning in its tracks. As a result, speed is essential when trouble first appears on the distant horizon. For instance, a debtor had his financial advisor call me several weeks ago from New Jersey to discuss asset protection options including buying a Florida homestead. There was a potential civil lawsuit in sight, but no lawsuit was anticipated in the near future. During the next three months the advisor called several times to schedule and reschedule consultations, each time asking a few preliminary questions about moving to Florida. Neither the client nor the advisor ever scheduled a consultation nor took any action on their own toward moving from New Jersey. This week the same advisor called again and said that while the client's civil suit was the main issue, the client was also going through a divorce and the divorce court just issued an order prohibiting the sale or transfer of any of the client's assets. The advisor asked if it was still possible for the client to sell the New Jersey home and buy a primary residence in Florida to protect the client from the potential civil suit. Its too late.

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A well- conceived asset protection plan can fail because attorneys use standard, off-the-shelf business forms to create legal entities to hold the debtor's assets. Case in point is a case I worked on with a creditor's attorney to penetrate a very complex asset protection plan involving domestic limited liability companies whose membership interests were owned by domestic trusts. The planning attorney used llc forms typically used for operating business and standard estate planning trust forms.

Standard llc forms and estate planning forms are designed to provide current income to the llc owners and trust beneficiaries. These typical forms often provide for mandatory distributions of all current income. In this instance, we convinced the trial judge to compel the llc manager and trustee of the trust to follow the terms of their documents and make current income distributions to the debtor and his family. We were then able to seize the llc required distributions with charging liens and garnishment proceedings.

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Interest in the Nevis LLC is increasing. I received an email from a physician who lives and is licensed in Florida. He wanted to know if he could establish a medical business through a Nevis LLC. Under Florida statute, any licensed professional business has to be designated as a professional corporation (a PA) or a professional limited liability company (PC or PL). Nevis has no statute permitting a professional LLC. Even if it did, I suspect Florida law requires that the PA or PL be Florida entities. Nevis LLCs have limits, and this is one of them. I do not think they are appropriate for a professional practice.

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I never stop learning about asset protection; I am always looking for new and better ways to protect people's assets. This week I attended a meeting of a small number of nationally recognized financial professionals and tax attorneys as a guest of one of the member firms. The majority of attendees were nationally recognized financial planners who were top producers; the professionals at this conference service exclusively the wealthy and very wealthy.

At this conference I learned about several advanced level financial products that can be great asset protection tools. I have found that many asset protection clients reject financial protection tools because these tools are primarily insurance based. I had usually agreed with my clients that they should be suspect of insurance and annuity programs because someone was making a commission.

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The general rule is that property owned by a husband and wife as joint tenants with rights of survivorship is presumed to be a tenancy by the entireties ("TE") which is protected from the individual debts of either spouse. I received an email question about a property owned by a husband, wife, and their child as joint tenants with rights of survivorship. The writer wanted to know if the property would be protected from one spouse's creditor.

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A caller asked about whether a bank account owned by married Florida residents is exempt as tenants by entireties property if the account is in a foreign bank with no United States offices or branches

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A prospective client had established several years ago an irrevocable trust. The trust provided that all income be paid to the client, settlor, during his lifetime, and that upon his death the balance of trust property went to other named beneficiaries. The trust agreement had a spendthrift provision which says the settlor's income interest could not be assigned or attacked by his creditors. The prospective client thought that his interest was protected because the trust was irrevocable and because of the spendthrift agreement. I advised him that this trust would not protect him from creditors and that it would not survive a bankruptcy.

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I recently had dinner with a well-known and extremely bright asset protection attorney from south Florida. Dinner conversation touched on the topic of domestic asset protection trusts. Domestic asset protection trusts (DAPT) are self-settled trust where the debtor is both settlor/trustmaker and the primary beneficiary. Domestic asset protection trusts set up in states which have enacted statutes to protect self-settled trust from attack by creditors of the settlor. Florida has no DAPT statute, and Florida courts have provided no asset protection to any self-settled trust.

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Some types of personal property have little value to anyone except a debtor, but the property is extremely valuable to the debtor. Although the same property has little market value in the hands of a creditor, the creditor may still seek to levy on this unique personal property in order to pressure the debtor to pay all or part of a judgment.

An example I recently experienced was a client who ran a sales business primarily though the internet. The business had no inventory, and all sales were paid in advance so the business had no receivables. The business's most valuable asset was the domain name of its website. If a creditor levied on the domain name the creditor could close the website and business would grind to a stop. Even though the website domain had little market value in the creditor's hand it could be a primary target of collection efforts.

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A few married people who are concerned about asset protection have asked whether it is better to hold property jointly as tenants by entireties or title property in the name of the one spouse least likely to be sued. Both forms of ownership are protected from creditors of the spouse most likely to become a judgment debtor. There are different consequences in the event the non-debtor spouse predeceases.

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I read a living trust agreement which attempted to use a "trust protector" in addition to a trustee for reasons including asset protection. Trust protectors are common in offshore trust planning designed primarily for asset protection. Trust protectors are less common in living trusts designed usually for estate planning and probate avoidance. This particular trust agreement included a trust protector whose stated powers included transfer of assets owned by the living trust to any other trust created for the benefit of the living trust beneficiaries regardless of who created the other trust. For example, if the trustmaker's parents or grandparents had themselves created an irrevocable or testamentary trust for the benefit of the settlor of the living trust, which other trust included asset protection provisions such as a spendthrift clause, the trust protector had the power to transfer all living trust assets to the other asset protection trust. Presumably, the maker of the living trust would argue that there was no fraudulent conveyance because the transfer was done by the trust protector without the consent or participation of the trustmaker.

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I received an email today from a blog reader who is interested in establishing a limited liability company for asset protection purposes. The reader suggested that Florida may not limit creditor remedies to charging liens against LLC interests and that Florida residents are better served by an LLC created in Nevada or Delaware.

In almost all cases, I find no advantage for Florida residents to filing an LLC in states other than Florida (with exception of Delaware series LLC in special cases). The Nevada and Delaware LLC laws are "sold" on the internet as asset protection tools, and many people have sought out these LLCs. The Florida statutes specifically provide LLCs the same asset protection as available to limited partnerships. People in Florida should not pay more money for an LLC located in any other state.

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Many of my clients own successful business and use large law firms for their business legal work. The clients often say that their big firm attorneys provide excellent advice about business planning and tax planning, but that they do not seem able or willing to provide help with their personal asset protection planning (which is why they seek help from me). I have talked to many "tall building" attorney about asset protection, and I find that most do not feel comfortable helping even their best individual clients in this area.

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A consultation today brought up an interesting issue about the effect of living trust estate planning on tenants by entireties and other asset protection issues. The client is a prospective defendant in a lawsuit. The client and wife have a joint living trust for which they are both trustees. The trust agreement divides their property between the husband's trust share and the wife's trust share. An appendix lists specific property in the husband's share. We discussed the following issues. Is it possible to claim tenants by entireties to joint trust property where property is allocated within the trust to either spouse individually? I think probably not. In the event the husband and wife as trustees convey cash from the joint trust bank account to an account outside the trust titled husband and wife, when the trust's cash account is specified as husband's asset, is that a fraudulent conveyance from the husband to a joint account? Is the cash now jointly owned because it is in a joint trust account, or is it the husband's property because the trust agreement allocates ownership to the husband? I think a creditor would have a valid argument, and the result is uncertain.

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Family partnerships and limited liability companies have similar asset protection benefits for the owner who is, respectively, a partner or member. Florida statutes limit the creditor's remedy to a charging lien against the debtor's ownership interest. I am often asked which entity provides better asset protection. Sometimes people asks to compare a family limited partnership to an offshore LLC.

The best entity for asset protection depends on several factors that vary case by case. For an example, an individual business owner cannot transfer his business to a partnership unless he brings another owner into his business; a partnership requires at least two owners. If two businessmen own a business and one is in poor health a partnership may not be appropriate because if the ill owner dies there will only be one partner remaining . The partnership will dissolve unless the decedent's shares pass to his heirs, but the other original owners may not want to be partners with heirs. The LLC offers flexibility to the extent it allows for one-person ownership.

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I received an interesting comment about Delaware Series LLCs from a reader named David. I want to post the comment in its entirety because it is an interesting insight on the effective use of the Delaware LLC in asset protection planning:

At this point in time, you should use the Delaware Series LLC as a holding company. If you own stock, use a separate series for each different company stock you own. With regard to real estate, if you own real estate in California and place it in a Delaware Series LLC, it will still be under the jurisdiction of a California Court. And the California Court may not respect Delaware Law. So my point is simple, set up a brokerage account in Delaware, have a nominee officer from Delaware operate your business. If there is ever a lawsuit, your adversary would have to file a claim in Delaware. And I would bet you a million dollars that the Delaware Courts would uphold the statutes which make the Delaware Series LLC such a formidable asset protection tool. This is an asset protection tool which will provide maximum protection only when used properly. I wouldn't use it to hold it any real property outside of Delaware. This tool has its limitations. Respect those limitations and yo u shall be nicely rewarded. Don't "overuse" of over extend yourself with the Delaware Series LLC. Set it up such that it strictly does business in Delaware. The bottom line is if you get sued, you want to fight it out in Delaware!

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I have recently encountered significant discussion of Swiss annuities. One client asked me to research their effectiveness in asset protection; another client, a U.K. citizen, said that he already owned two Swiss annuities which he purchased in the U.K. I asked other attorneys if their clients had used Swiss annuities in asset protection. Attorney Alan Gassman, of Clearwater, Florida, a very good asset protection and tax attorney, said that two of his clients purchased Swiss annuities. Other asset protection attorneys, however, responded that they had no experience with these instruments

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I had set up a single member limited liability for a client to hold his investment assets. The client asked that the LLC appoint a friend as manager. The friend was appointment as manager so the client would not hold discretion to make distributions which could be subject to a charging lien. The LLC agreement gave the members (client) the right to replace the manager. The client asked if he should insert an anti-duress provision in the agreement which would say that the manager would not make distributions under duress. These anti-duress clauses are usually found in offshore trusts agreements to prevent the offshore trustee from complying with U.S. court orders. Sometimes they work; often they do not work. I don't think they would work with a domestic LLC because the manager, if a U.S. resident, would comply with the court to protect himself from contempt regardless of the anti-duress language.

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