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

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.

 

Here are few examples of things not to do fi your business is in financial trouble. All examples come from my own client’s proposals or actual activities. You cannot drain business dollars to pay back loans you made to start the business (improper preference); you cannot use business assets to pay inflated salary or other compensation to family members as employees or consultants (fraudulent transfer); you cannot use business funds to make gifts to children or large retirement contributions because you had always done so in the good years (fraudulent transfer to insiders); and you cannot cash checks from the business accounts and stuff the cash under the mattress( there are bank records and creditors are not that dumb).

Basically, be fair to both yourself and business creditors.  Don’t use your position as business owner to drain business funds into your own account or your family’s accounts.
 

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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.

You can use a land trust to incorporate both privacy and asset protection.  For example, a married couple might draft a land trust which designates the beneficiary as the husband and wife, tenants by entireties. The beneficiary could be a partnership or multi-member LLC each of which have asset protection benefits. Your personal names will not show up on the public record as property owners/ You will need a trusted third party to be trustee of the land trust.

 

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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.

 

Don’t dig your legal hole deeper than is already is. If you have a good asset protection plan in place then it is in your advantage to be open and cooperative in your responses to creditor questions. Trust the plan.
 

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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.

 

The substitute general partner can be a multi-member LLC. The client’s creditors could no levy upon and gain control of the LLC and thereby gain control of the partnership (Ohmstead applications aside). I think this change would withstand fraudulent transfer/conversion attack.

 

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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.  

This asset protection plan was not air tight. The client’s status as a Florida resident could be challenged because he spent most of his time at his former Virginia location. His investment of money in his brother’s business could be challenged. Nevertheless, at the parties’ most recent mediation the client announced to the opposing attorney that he had purchase a home in Florida and moved to Florida. He claimed that he was living off money in his joint marital account. He did not claim he was “judgment proof” or that any judgment against him was “worthless.”

The opposing attorney did not react to the client’s pronouncement at the mediation. The next week the case settled for zero dollars. Both sides agreed to withdraw their competing claims and pay their own fees. This is how asset protection is supposed to work. The client’s asset protection plan was not perfect, but it was good enough to convince his opponent that the already expensive lawsuit would be followed, at best, by an expensive collection process of uncertain result. Asset protection cannot eliminate all potential problems such as fraudulent transfer issues or the potential for the rare involuntary bankruptcy, but it can substantially increase your negotiating power in civil litigation.

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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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A reader asked me about using a long term care insurance product as an asset protection tool. The reader says that an insurance agent told him about long term care insurance that can be paid up front in a single premium payment. The insured makes a lump sum payment to the insurance company in return for long term care policy for the rest of his life. The age and health of the insured determines the amount of the lump sum payment.

Built up cash value in life insurance policies is exempt from creditors and bankruptcy trustees under Florida statutes. The statutes do not exempt cash value of any other insurance. Other insurance, such as health insurance and property insurance, if paid up to date is not an asset subject to creditors because no money is owed to the debtor prior to the event covered by the insurance (medical expense or property loss). Money spent to buy expensive insurance generally is not a fraudulent conversion because most people buy insurance for reasons other than asset protection. .

I have never seen a fraudulent transfer case dealing with the debtor’s single premium long term care insurance. In my opinion, the answer depends on whether the debtor/insured retains any right to cancel the policy and receive a refund. If the single premium is irrevocable with no right to cancel if the debtor changes his mind then I think the debtor has protected the money from his creditors. On the other hand, if the debtor is entitled to a refund or to borrow unused future premiums then I thank a creditor could levy upon the money. The creditor cannot attach any more than the creditor can get for himself.

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I often receive phone calls from out of state resigned that they cannot achieve any of Florida's asset protection benefits because they do not reside in Florida- not exactly. While it is true that Florida's statutory creditor protections are specifically limited to Florida residents and Florida homestead presume permanent Florida residence in the house, Florida law does include asset protection available to non-residents, and even to people who have never set foot in Florida.

I’m referring to tenants by entireties protection available to a single debtor of a married couple.. Tenants by entireties protection from individual creditors is based on Florida common law defining Florida property. The concept applies to Florida property regardless of the owners’ residence. I wrote a post on this topic last year, but its worth repeating for current readers because most callers from outside Florida still think they have to move into their Florida house as a homestead in order to protect the house from judgments.

If a married couple living in any state in the United States buys real property in Florida that property is considered owned tenants by entireties and is exempt from judgment creditors of either spouse. Regardless of where the debtor resides, and regardless of where in the U.S. the judgment was entered, the creditor will have to domesticate the judgment in Florida to lien the debtor’s property. The foreign (out of state) creditor of one spouse will find that Florida law will not permit him to attach his judgment to the debtor’s jointly owned Florida real estate.

People do not have to move to Florida to used tenants by entireties law to exempt real estate they purchase in Florida.

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A few days ago I wrote a blog post comparing the asset protection of Totten trusts and UTMA("uniform gift to minors") financial accounts. I explained that the Totten trusts were not protected from creditors because the accounts could be revoked or invaded by the parent, whereas the UTMA accounts were protected because deposits made to these accounts are legally irrevocable. The asset protection of the UTMA account presumes that the parent follows the law.

A caller from Miami had read the UTMA blog posts and wanted to confirm the protected status of his child’s account. The story is told that a few years ago when the caller was "rich" he made a six figure deposit into his only child’s UTMA bank account. His intent was to set aside some money for his child’s college education. Then, the recession. The caller lost over a year ago. He spent his savings supporting his family. In his last effort to keep his house he began paying his mortgage from his child’s UTMA account. He called me because he just wants to make sure that his increasingly angry creditors cannot get the UTMA account so he’ll be able to keep the house until he finds work.

I think this caller’s creditors have a good argument to permit their garnishment of this debtor’s UTMA account. The law protects UTMA accounts because this type of account is an irrevocable gift to a minor child. When this parent disregards the irrevocable nature of the account and treats the money as his personal savings account he is destroying the reason for the account’s protection. Debtors should not be allowed to asset protect their own savings and checking accounts just by bestowing them with a UTMA label.

If debtor’s want to protection benefits of a UTMA account they must follow the rules; once the parent gives the money to the child’s UTMA account the parent cannot get it back. If the parent does not follow that simple rule then they should forfeit the UTMA benefits.

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Asset protection planning sometimes involves knowing and purposeful fraudulent conveyances. An attorney from south Florida called me recently to discuss the following plan he would propose to his client. His client, a married man, was a defendant in a civil suit. The judge had just granted the creditor’s motion for summary judgment, and the judge would probably enter a final judgment as soon as the creditor submitted proof of damages.

The man owned a one-acre lot upon which he was constructing a house to be his future homestead. The problem is that the court would be entering a final money judgment before the house was completed and occupied. The final judgment would be automatically a lien on the lot. Subsequent occupancy as a homestead would not remove the pre-existing lien.The attorney wanted to know if he should advise the client to quit-claim deed the lot to his wife for the remainder of construction and then have it conveyed to joint ownership when the couple moved in as their new homestead. I think the plan would work.

Without doubt the man’s conveyance of title to his wife at this point is a fraudulent transfer. The remedy is reversal and possible a judgment against the spouse. But, the fraudulent transfer remedy is not immediate and automatic upon record of the creditor’s anticipated money judgment. The creditor will have to discover the transaction, file a motion, and get a hearing date before a judge to hear the motion. The debtor’s counsel can defend and extend the time. By the time a court declares the quit-claim deed to be a fraudulent transfer house construction will be complete and the debtor will occupy the home as his homestead.

The creditor’s judgment will not have become a lien on the house titled in the wife’s name prior to occupancy as homestead and the property should be saved. Most times an obvious fraudulent conveyance will cause more harm then good; but sometimes, like this attorney’s example, a fraudulent conveyance is the best solution.

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I don’t defend mortgage foreclosure suits against my asset protection clients, and instead, I refer people to one of several real estate litigation attorneys who do a good job forestalling foreclosures and negotiating releases of personal liability. I spoke this weekend with one such foreclosure defense lawyer about his foreclosure defense tips.

This attorney  said that many people expect him to assert the most aggressive and comprehensive defense against the bank’s foreclosure. Many people have heard of foreclosure defenses based on Truth in Lending violations and technical defects in the bank’s HUD statement and other closing documents. This attorney explained why in his opinion the maximum defense is not always the most practical defense. He said that his clients realize that they cannot ultimately escape foreclosure, but that most are willing to relinquish their home for a release of deficiency liability.

He has found that most large lender foreclosure firms have at least two groups of attorneys. The most experienced litigators deal with the most complicated mortgage foreclosure cases, including those cases where the borrower’s attorneys have raised sophisticated legal defenses. Most foreclosures, including uncontested cases and the basic defenses, including the "lost instrument defense" and technical legal procedure issues, are handled by less experienced attorneys and other staff.

This attorney has found that clients who insist on the more complicated foreclosure defenses find their cases handled by the lender firm’s most expensive attorneys who have a lesser caseload and have more time to expedite the foreclosure. This attorney’s own fees to assemble and prosecute an aggressive defense are many times higher than making an ordinary foreclosure defenses. The ordinary, less expensive defense, usually ends up delaying the bank’s foreclosure more than an aggressive defense because the bank’s attorneys handling these ordinary cases have a much larger caseload and are much less experienced. These bank attorneys typically ignore files or make simple procedural mistakes which delay their own foreclosure.

This mortgage defense attorney summed up his advice as follows. If the bank’s policy is to exchange liability and deficiency releases for relinquishing foreclosure defense then it does not matter, practically, whether the homeowner’s legal defense is complicated and aggressive, or simple and economical. If the bank’s policy is not to give releases then a complicated litigation defense rarely changes the bank’s mind. So, he says, defend foreclosures but keep it simple. That’s one person’s opinion.

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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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Often, a high-risk professional will title all assets in the name of their non-professional spouse as an asset protection plan. The professional thinks they are a lawsuit target, but in the event they are sued, they could tell their adversary that they "have nothing in my name." It’s a simple plan, but it sometimes backfires. Here’s an example where putting everything in the name of low risk spouse did not work out.

A woman physician worked in a high-risk specialty. Her husband worked for a large company in a non-professional job. The couple bought investment real estate and titled all parcels in the husband’s name alone. Their bank accounts were in the husbands name, as were some non-retirement stock accounts. You can probably guess what happened.

The husband called me for asset protection advice because he had been at fault in a serious car accident. He had only $20,000 liability insurance. All of the assets titled in his name, and bought mostly with his wife’s earnings, were at risk. Fortunately, the car he was driving was also in his name only so his wife would not be liable for the car accident. What did they do wrong?

This couple made two mistakes. First, they should have titled their investment assets as tenants by entireties rather than in the husband’s name alone. Assets titled in the entireties would be exempt from the husband’s car accident liability as well as from the wife’s professional liability. Entireties protects against any judgment against just one spouse. If each spouse has a judgment from a different lawsuit and for a different reason the entireties protection works against all the judgments.

The second mistake is lack of adequate insurance. In Florida, both the driver and all car owners are responsible for car accidents. If one spouse is driving a car owned jointly or in the name of the other spouse both spouses are held liable for the full amount of damages. If you have significant assets in the family you must get a large umbrella insurance policy to cover automobile and homeowner liability.

You may think you know whom in the family is going to be sued and for what reason- such as, the dreaded professional malpractice liability. Sometimes its what you don’t expect that gets you. Both spouses and all assets must be protected in a property asset protection plan.

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