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

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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An annuity is broadly defined as a contractual right to a payment stream. A bankruptcy debtor sold his business in consideration for a cash down payment and a promissory note providing for the buyer's  minimum payments of $2,000 per month. The sales contract provided that the buyer's  monthly payments could increase if the buyer’s business revenue exceeded a certain amount. The seller subsequently filed Chapter 7 bankruptcy and claimed the buyer’s payment obligation as an exempt annuity pursuent to Sections 222.14 of the Florida Statutes.

The bankruptcy judge said the parties' promissory note is not an exempt annuity because it is a "promissory note." For the debtor to have exempted the buyer’s payments under the annuity exemption, the court stated, the buyer and seller must have intended to create an annuity contract. The court pointed out that the parties agreement is entitled "Promissory Note", that there is no reference to an annuity contract, that the buyer’s payment to debtor does not terminate upon the debtor’s death, and that the debtor is not identified in the sales agreement as a beneficiary of an annuity contract.

The court’s holding in this case is clearly correct; a debtor cannot take a self-described promissory note and call it an exempt annuity in bankruptcy court. But, the holding suggests asset protection planning opportunities for others. Sellers of businesses or real property could gain creditor protection of deferred sales income  by including in the  deferred payment provisions typical annuity features such as contingent death beneficiaries and payment termination after a certain number of years. The sales agreement could state that the buyer would pay the purchase price in the form of a cash down payment and a "private annuity contract" with typical annuity features. If the parties can demonstrate their intent to create an annuity contract rather than a promissory note for a fixed principal amount with interest this case suggests asset protection benefits. In re Holt, Case No. 08-bk-4288

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"Can I still do asset protection planning after there is a judgment against me?" A very common question. The answer is "yes" in many cases. Here’s an example from last week’s clients of legitimate and effective post-judgment planning.

This elderly lady had guaranteed her son’s business loan which the son could not repay when the business failed. The business and loan was made in another state with a national bank. The bank just got a judgment against mother and son for several hundred thousand dollars. The mother lived in Florida in a home with a $40,000 remaining mortgage. She had about $60,000 savings in accounts at the same bank that got the judgment. She lived primarily off monthly checks from her deceased husband’s pension and social security.

Here are the post-judgment planning steps she is considering. First, she pays off her remaining mortgage leaving her with about $20,000 at the creditor bank. Paying a homestead mortgage cannot be reversed under Florida law. Next, she’ll move the financial account from the creditor bank to a small bank in Florida; she is not "hiding" the money, but she is removing the money from the "creditor’s doorstep." The mother’s litigation attorney can probably delay discovery of new bank accounts for a few months after judgment.

The mother will stop using her exempt pension proceeds and social security to pay monthly living expenses. Instead she will use her savings to pay expenses until the money is depleted and hopefully before it is located and garnished. She can use money to make repairs and improvement to her homestead as well as pay her legal bills and taxes.

The unspent pension and social security money can be used to purchase an immediate annuity. Florida statutes exempt from creditors annuities and all annuity distributions. Using pension and social security money to buy an annuity is not a fraudulent conversion because the pension and social security checks are themselves exempt from creditors. When her cash is spent, the debtor mother can revert to living off the pension, social security, and her new annuity.

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