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

As a general rule, a creditor cannot challenge as a fraudulent conveyance any transfers of assets made more than four years ago. I use the four year statute of limitation applicable to fraudulent transfers and conversions as a planning guideline and do not advise most clients to consider additional asset protection tools to protect transfers four years in the past. There are, however, exceptions to this general rule which permits creditors to challenge older asset transfers. Specifically, Florida Statute 726.110 provides that a creditor can challenge as fraudulent an asset transfer to avoid pre-existing creditors for one year after the creditor was or could reasonably have been discovered by the creditor under certain conditions. This Statute gives some creditors the ability to challenge a conveyance no matter how ancient for a period of one year after the creditor's actual or constructive discovery.

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When a small family business encounters business problems they do everything they can to preserve money. One of the first steps usually is reducing or deferring salary payable to the owners. Some businesses borrow money from other family members to pay bills. Some business cannot recover nor can they obtain enough capital to survive a recession, and eventually, they recognize that the business must shut down. I have often been asked by owners of failing businesses whether they can use what money is left in the business to pay themselves deferred salary or to repay their family members. The owners would prefer to pay themselves and their family rather than expose what money remains in the business to creditors. The owners think its fair to pay what are legitimate obligations to themselves or family. Unfortunately, payments from a failing business to owners or their family may be subject to reversal under Florida law.

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Generally, if a husband transfers non-exempt property to his wife in the face of a creditor's claim or lawsuit, the transfer will be reversed a a fraudulent conveyance. From time to time people who anticipate a legal problem tell me that in the event they lose a lawsuit they will divorce their wives and give their property to their wife as part of the divorce. The legal issue is whether there can be a fraudulent divorce to avoid or delay creditors. Does the fact that the divorce settlement is approved by a court protect property transfers made pursuant to the settlement agreement?

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Fraudulent conveyance is always the largest issue in asset protection planning. A debtor has a strong defense to a fraudulent conveyance threat if the debtor can prove that he sold or transferred an asset for value. For example, if a debtor sells an asset to a third party and receives money or property in return the debtor is left with the equivalent amount of assets and the creditor is not harmed thereby. The question often is how much money does the debtor need to receiver for a transfer of asset in order to avoid allegations of a transfer to defraud creditors.

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A caller described his asset protection plan designed by his financial planner. The caller had created a "grantor retained annuity trust" which he funded with about $500,000 within two years of being sued. The trust had been accumulating income, but the trust document named the grantor/debtor as the sole lifetime beneficiary. Income paid to the grantor from the trust would be in the form of an annuity for his lifetime. All annuities, in whatever form, are exempt from creditors in Florida. The caller's estate was below the level susceptible to estate tax.

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Many people tell me they are planning transfers that they do not think will be challenged as a fraudulent conveyance because no creditor has yet to file a lawsuit. For fraudulent conveyance issues the important event is not the lawsuit or judgment, but it is the creation of a claim. Fraudulent conveyance statutes address creditors' "claims" not creditor lawsuits or creditor judgments. "Claim" is defined by the statutes. A claim means a right to payment, whether or not the right is reduced to judgment, is liquidated, fixed, contingent, disputed etc. A transfer of assets made even under the vague shadow of a potential claim is subject to attack as a fraudulent transfer under Florida Statute 726 even though substantial time passes before a lawsuit if filed or judgment awarded.

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I have cordial professional relationships with a few creditor attorneys. Sometimes, a creditor attorney who is representing a debtor client invents interesting asset protection strategies. Mr. Larry Kosto of Orlando, Florida, is one Florida's best collection attorneys. Larry says that he represented a debtor who owned assets jointly with his spouse which assets, for one reason or another, could not be deemed protected tenants by entireties assets. He came up with an interesting plan to transfer the joint assets to the non-debtor spouse and avoid fraudulent conveyance.

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Man owns several rental properties and a primary residence. He is concerned some of his rental properties will be foreclosed as the falling real estate market has made it impossible to sell the homes for enough money to pay the mortgage and rental income does not cover monthly expenses. One of the rental home is owned free and clear. The man asked whether he can protect the free and clear home by deeding it to his adult child and having the child move into the home as the child's primary residence. The man understands the transfer would be a fraudulent conveyance if one of his homes went into foreclosure and resulted in a deficiency judgment in the near future. His question is whether a creditor could take the transferred house occupied by the child and whether this is a viable asset protection plan.

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I found an interesting issue in a California bankruptcy case concerning fraudulent conveyance. A bankruptcy corporation paid many expenses within one year of bankruptcy including salaries and other money due to corporate insiders who had provided services to the corporation. The Trustee filed a complaint alleging the payments to insiders were fraudulent transfers. Some corporate insiders were Florida residents. The bankruptcy trustee sued these Florida insiders under the fraudulent conveyance sections of the bankruptcy code and under Florida's fraudulent conveyance statute. A jury returned a verdict against the insiders, in favor of the bankruptcy trustee, finding that there were fraudulent transfers and that such transfers were made "with malice." The court entered a verdict against the Florida insiders finding them jointly and severally liable for the total amount of fraudulent transfers by the debtor corporation and imposing $2 million punitive damages. The individuals are considering whether a fraudulent transfer judgment can include punitive damages.

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I often receive calls, like this one, where a potential debtor is concerned that asset protection planning can affect his spouse. This man wanted to open a new bank account with his wife as "tenants by entireties" and deposit some of his separate money in the account. There were currently no judgments or lawsuits against the caller, but he was involved in a business disagreement which he feared could lead to a lawsuit and liability. He wanted to better protect his assets, but he did not want to make his wife involved in his problems.

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Debtor inquired whether they can shelter money from a creditor by transferring the money to their private charitable foundation. The first question is whether the foundation qualifies and operates as a charitable entity for tax purposes, and if it does, the next question is whether a donation to a charity may be undone as a fraudulent transfer.

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Consider a man and his wife who moves from Georgia to Florida and purchase a homestead for $100,000 cash. Title to the homestead is in the name of the husband only. After he and his wife reside in the new home for a few months, the man gets an equity line second mortgage. He uses $50,000 of loan proceeds to purchase an investment property title to which is taken in the wife's name only. A year later, the man encounters severe financial difficulty and files chapter 7 bankruptcy. Because he has not lived in Florida for two years prior to filing he is not eligible for Florida bankruptcy exemptions and must file with Georgia exemptions even though he is a Florida resident. Georgia has a relatively small homestead exemption which I'll assume is $10,000. (exact amount is not relevant ). Therefore, only $10,000 of his homestead is an exempt asset in bankruptcy. The issue is whether the equity line loan used to purchase the $50,000 property for his wife is a fraudulent conveyance of $40,000 subject to attack in the bankruptcy

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A judgment is entered in favor of the defendant and against the plaintiff.. The plaintiff files an appeal. The defendant asks whether transfers of non-exempt assets to his spouse after his win in the trial court could be attacked as fraudulent conveyances in the event he loses the appeal and the plaintiff's case is reinstated.

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Clients often tell me of their frustrated attempts to get competent asset protection advice from attorneys who work in large law firms. Attorneys in traditional, "tall building" firms take a dim view of asset protection planning. As an example, a colleague attended last week a seminar on Florida asset protection taught by an attorney in one of Florida's silk stocking law firms. The instructor taught that any transfer or conversion of assets that is later found to be a fraudulent transfer in violation of Florida's fraudulent transfer statutes constitutes criminal fraud. Accordingly, any attorney who assists or advises a client to make a transfer of property subsequently reversed by a court as a fraudulent conveyance is engaged in assisting the commission of a crime. Such attorney, according to the instructor, is not only unethical but may himself be subject to civil remedies and criminal prosecution.

The problem with this opinion expressed authoritatively to other lawyers at a teaching seminar is that the view is unsupported by Florida law and has been rejected essentially by Florida courts. There is not statute that deems a fraudulent conveyance to be a criminal violation or punishable by fines or incarceration. The Florida Supreme Court and lower appellate courts have thus far consistently found that the fraudulent conveyance statutes are creditor recovery remedies only and they impose no additional civil liability on the debtor or any third party who assists the debtor. Some Florida judges have expressed contrary views in dissent opinions, and other state courts have reached contrary conclusions based on their own state's laws. Florida law, however, is based not on minority views or foreign law, but rather on the decisions by the majority including the Supreme Court.

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One unresolved issue in common law of fraudulent conveyance concerns business profits or distributions from closely held corporations which are used to support the debtor's family. For example, suppose a judgment debtor supports his spouse and children with earning from his business corporation of which he is the chief executive and sole stockholder. The business pays the debtor a salary and profit distributions. The debtor deposits all salary and profit distributions into a bank account owned jointly with his non-working wife. The money in the account is used solely to support his wife and children. The salary is exempt because the debtor is head of household. The question is whether the deposits of corporate distributions to the joint checking account are fraudulent transfers of the debtor's corporate profits to the debtor and his wife.

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I read a report in Leimberg Information Services about a Missouri Court of Appeals case which held that a debtor and other parties can be held liable for civil conspiracy in a fraudulent transfer when they create new entities through which the debtor conducts future business. The case essentially finds that opportunity shifting is a form of fraudulent conveyance. When a creditor obtains a judgment against a business and its principal owner the individual businessman often starts a new company to conduct the same business and gives ownership of the new business to his spouse or other family member so that neither the new corporation nor the owners are subject to the prior judgment. The Missouri court found this technique of creditor avoidance, although not a traditional form of transfer, nevertheless could be undone as a form of fraudulent conveyance. To date, no Florida case has reached the same result. The Missouri court also found the debtor and his wife were both liable for damages on the theory of civil conspiracy for their efforts to set up successor businesses operated by the debtor. Leimberg's article says that the case is evidence that, "civil conspiracy is the creditor's new super-weapon against planning meant to render a debtor judgment-proof." While this observation may be generally true throughout the county, Florida courts have held uniformly that the fraudulent conveyance statutes do not support claims against third parties for civil conspiracy or any other basis of liability.

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The May edition of the Florida Bar Journal contains an article Mr. Robert Meyer about whether a disclaimer for estate planning purposes can be set aside as a fraudulent conveyance against creditors of an heir or trust beneficiary. The article includes an interesting discussion of the meaning of insolvency for purposes of fraudulent conveyance allegations.

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I was in a deposition today representing a lady who was the recipient, transferee, of an alleged fraudulent conveyance. The allegations are unique; here's what happened. My client, a professional mortgage broker, loaned money to a businessman evidenced by a promissory note. The note stated that the loan was secured by two parcels of real estate and a mortgage note receivable from a third party. At the time of the loan, the collateral's value was close to the original note amount. The note was not recorded, and there was no separate mortgage. My client did not know the borrower at the time of the loan, but subsequent to the loan they became good friends. The businessman found it impossible to make payments on the note. My client and the businessman agreed that to satisfy the note the businessman would assign to my client all the collateral. The collateral by then had appreciated, and my client received assets close to double the amount of money she originally loaned. Just over one year after the assignment of collateral the business man filed Chapter 7 bankruptcy. The trustee is suing my client to recover the assigned assets.

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A caller asked me if a debtor could protect assets by legally changing his name and then conveying assets to his new legal name. He reasoned that this would not be a fraudulent conveyance because he was transfer title to himself, just under a new name. This was an innovative asset protection ideal, but it is not a good asset protection plan. The caller did not understand that the fraudulent conveyance statutes also include a prohibition on fraudulent conversions. A fraudulent conversion is when the debtor sells an asset that is not exempt from creditors and buys an asset which is exempt. An example would be selling publically traded common stock and purchasing an annuity. Annuities are exempt from creditors under Florida law. Fraudulent conversions can be undone under the same rules applicable to fraudulent conveyances.

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A new client presented a plan to undo a potentially fraudulent conveyance. Client and spouse had used a joint line of credit from a bank to borrow money for several investments. Some investments made in companies owned solely by husband made a profit. These companies distributed some profits to husband who, in turn, conveyed the profits to other companies owned solely by his wife.

A creditor obtained a judgment against husband only. To undo what may be deemed a fraudulent conveyance of profits to his wife, the husband and wife borrowed more money from the same lender on the same line of credit and deposited the borrowed funds in wife's solely owned company. The wife's company distributed to the wife/owner funds equal to the amount of profit the company had first received from husband's company, thereby, reversing the potentially fraudulent conveyance. The client wants to know whether this plan makes moot any fraudulent conveyance action against wife and her company.

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A speaker at a legal seminar on Florida asset protection law, when discussing homestead protection in Florida described homestead as a state of mind. Homestead law seems simple, but it is actually very complex involving many facts and nuances. I think that describing Florida homestead as a state of mind captures the essence of homestead law. What the speaker was referring to is that whether a property serves as your Florida homestead is a matter of your subjective intent. Your intent includes things only you know in your own mind. For example, homestead protection is available to you if you really intend to make the property a permanent and primary place of residence. It also matters whether you consider Florida as your home state. On the other hand, if you intend to remain here only until legal clouds are clear and then return elsewhere you do not have the homestead state of mind. Homestead therefore depends on facts and circumstance- your behavior- which indicate to a judge what your true state of mind is in regards to your Florida property. There are no clear tests or standards that must be met to have a protected Florida homestead. The expression state of mind is a great description of a complex law that is easily understood by laymen.

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An email asked if the transfer of a personal residence from a land trust to the beneficiary of the land trust who resides on the property is a fraudulent conveyance under Florida law. I think that the transfer is not a fraudulent transfer under most land trust agreements. A land trust typically vests all beneficial ownership and use in the land trust beneficiary. The trustee holds minimal legal title, and the beneficiary retains total control over the trust property and the trustee. Even if the conveyance is deemed fraudulent, the result is that the residence once owned in the name of the beneficiary is exempt from creditors as a Florida homestead. The more important issue is whether the same property in the name of the land trustee has homestead protection. With the exception of one case to the contrary, most courts in Florida have extended homestead protection to a residence titled in a revocable living trust or a land trust where the beneficiary uses the property as his primary residence.

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The homestead protection afforded Florida residents is being tested in a Florida bankruptcy proceeding. The Florida Supreme Court, in the case of Havoco v. Hill, has held paying money to purchase a homestead property or applying funds to reduce the principal balance on a homestead cannot be reversed, set-aside, or undone on the grounds that the purchase or payment was a fraudulent transfers to avoid creditors. In the case of In re Potter, pending in the Middle District of Florida bankruptcy court, the bankruptcy trustee, Ms. Gene Chambers, has sued to recover approximately $300,000 which a debtor used to by a homestead approximately 18 months prior to filing bankruptcy on the grounds that the purchase was a fraudulent conveyance under Florida's fraudulent conveyance statutes. It will be interesting to see whether this court finds that the Florida Supreme Courts ruling in Havoco precludes this fraudulent transfer claim in bankruptcy, or whether the court ignores Havoco and applies a different legal standard.

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There is a common misconception that a party has to either have filed a lawsuit against you or has a judgment against you to be considered your creditor for purposes of fraudulent conveyance law. Transfers or conversions of assets to evade creditors can be reversed or the transferee sued for the value of the conveyance. Under Florida law, the term creditor is liberally construed, and almost anyone you do business with can be considered a creditor even if there is no existing legal dispute.

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