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

Over the years I have received many calls from Georgia residents wanting asset protection help. Other than inviting these caller to move to Florida there was not much else I could advise them to do for protection. I felt bad from these Georgia debtors because Georgia has few asset protection tools. For instance, the Georgia homestead exemption is limited to $10,000 equity. Georgia has no wage garnishment exemption and no tenants by entireties exemption. In Georgia, you have to pay your debts.

To appreciate the impact of the Ohmstead decision (discussed fully in prior post) it is interesting to compare the asset protection status of Florida LLCs to how Georgia law treats a debtor’s LLC interest. In Florida, after Ohmstead, a creditor can use all available creditor remedies to attack a debtor’s LLC membership interest, certainly in the case of single member LLC and probably in the case of multi-member LLCs as well. Under Georgia law, a creditor may get a charging lien and other remedies, but the Georgia statute specifically prohibits a creditor from foreclosing a debtor’s membership interest, The law also specifically prohibits a creditor from participating in LLC management which prohibition seems to stop a creditor from forcing the LLC manager to make distributions which could be subject to a charging lien. Georgia law has better LLC protections than does Florida law after the Ohmstead decision.

I never thought Florida’s asset protection laws could be worse than Georgia, but its happened with respect to LLC interests. It appears that our LLC protection has hit bottom.

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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.

The issue with this solution is whether a limited partnership could qualify to be taxed as an s-corp. IRS rules prohibit an s-corp from having more than one class of shareholder (not counting distinctions between voting and non-voting shares). If the general partnership and limited partnership interests are considered different ownership interests then a limited partnership cannot be taxed as an s-corp because it would consist of more than one class of ownership.

The answer is that there is no answer. In January, 2010, the IRS issued a Revenue Procedure bulletin stating in part that the IRS will not answer the question. The IRS said it will not issues rulings as to whether a state law partnership electing to be taxed as a corporation has more than one class of ownership for purposes of qualifying as a sub-s corporation. 26 CFR 601.201. Therefore, converting a single member LLC with s-corp shares to a limited partnership taxed as an s-corp is not a reliable asset protection alternative.

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After the Florida Supreme Court’s Olmstead decision the Florida limited liability has lost its utility as an asset protection tool. Is the LLC is done forever, or could it someday re-emerge as an asset protection entity. The Court’s adverse ruling was based largely on its interpretation of the Florida LLC statute. The court noted that unlike Florida’s limited partnership statute, the LLC statute provides that a creditor may get a charging lien against the debtor’s LLC interest, but that the statute does not say the charging lien is the "exclusive remedy" leaving available more effective collection tools such as levy and sale.

I’ve been monitoring some attorney discussion groups which are discussing asset protection planning in light of the Florida Supreme Court decision. For example, there is a very high level academic discussion through Leimburg Information Services including well-known estate planning and asset protection attorneys such as Alan Gassman, Chris Riser, and Mark Merric.. This discussion group, and some other experienced attorneys I’ve spoken with, seem confident that the Florida legislature will act to fix the LLC statute so that the charging lien remedy is made exclusive as is currently for limited partnership interests. Speculation is that the legislative revision could come in 2011, or if not, soon thereafter.

In the meantime, people with LLC businesses must deal with decreased asset protection against their individual creditors. Speculating on laws being passed by the Florida legislature is not sound asset protection strategy. While it seems logical, if not likely, that the legislature may make LLC’s charging lien provisions consistent with that of the limited partnership attorneys must help asset protection oriented business clients bolster LLC protection either by amending the LLC operating agreements or migrating to other business structures.

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Using a Florida limited liability company as an asset protection tool used to be relatively easy. Attorneys understood that a creditor’s sole remedy against a debtor’s interest in a Florida LLC, especially multi-member LLCs, was a charging lien. The charging lien gave the creditor restrictive and impractical tools to capture money from the debtor’s LLC interest. No more. The Florida Supreme Court’s Olmstead decision last month seems to give creditors the right to use any and all collection tools, not just the charging lien, to go after a debtor’s membership interests.

The next line of asset protection defense is the LLC operating agreement. Contractual provisions in the LLC operating agreement can minimize a creditor’s power to compel LLC distributions or liquidate LLC assets. Effective asset protection language is not in "off the shelf" or standard LLC operating agreements.

Prior to the Olmstead ruling a small business owner might get by with a "do it yourself" LLC. The owner could create an LLC online and buy a standard operating agreement online from any of the many sites that market legal forms. Once you realized the LLC was the preferred asset protection business structure a competent business owner could achieve good asset protection with the "do it yourself" Florida LLC. Not any longer. Do it yourself may work at Home Depot, but it won’t protect your Florida LLC from judgment creditors.

LLC owners concerned about asset protection are going to have to do something. There are many asset protection alternatives to the basic LLC structure. The simplest and cheapest next step - not necessarily the best or the most effective step- is to have an attorney customize your LLC operating agreement with provisions that will weaken and deter your prospective creditors. Yes, it may cost money. But, these things can happen whenever the Florida Supreme Court is in session.

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