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

 A client maintains a self-directed IRA which has purchased rental real estate. The real estate is titled in the name of the IRA. The IRA owns several properties as well as financial assets. A tenant filed a lawsuit. The client asked me to reaffirm his understanding that if he lost the lawsuit the tenant/plaintiff could not satisfy the judgment against the other real estate and financial assets because IRAs are exempt from creditors under Florida law.

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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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Think what you may about the politics of Florida’s legislature and our new governor, but the seem to be pretty good about fixing bad court decisions. I wrote blog posts previously about more than one Florida court decision finding that a debtor’s IRA inherited from another family member, excluding spouses’ rollover, was not exempt from the debtor’s creditors because the IRA represented an inheritance rather than the debtor’s own retirement savings.

Legislature to the rescue. Florida statute section 222.21 will be amended to specifically included inherited IRAs as well as rollover IRAs. You can read it here. The bill is retroactive so it does not matter if the IRA was established or inherited before this bill becomes law. Also, the bill is applicable to IRAs owned by Florida residents even if the deceased owner lived elsewhere.

To be safe, if you inherit an IRA you may want to move the IRA account to a Florida branch of the IRA custodian. If the decedent lived in another state and had his IRA account maintained at an office in his home state a creditor could argue that the exemption laws applicable to your inherited IRA are the laws of the state where the inherited IRA account is maintained.
 

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According to an article written by creditor and collection attorney Jorge Abril, thefederal government has issued a new regulation which makes it more difficult for judgment creditors to improperly garnish bank accounts containing government benefits. A variety of government benefits are exempt from creditor garnishment under federal law including, for example, social security, VA benefits, and civil service retirement. Nevertheless, if and when a Florida judgment creditor services a writ of garnishment on the debtor’s bank account the bank is likely to freeze all money in the account regardless of origin. A debtor who is living on social security and other federal payments has to go to court, often at significant expense, to assert his exemptions of his federal benefits and get the garnishment released.

Mr. Abril’s article explains that the new regulations effective May, 2001, requires a bank, upon receipt of a writ of garnishment, to conduct its own inquiry into the source of the funds in the garnished account, and if it determines that the account contains Federal benefit payments, to release the freeze on two months' worth of payments immediately, without any showing by the debtor.

This is welcome protection. Maybe Florida will pass rules requiring banks to likewise investigate whether money in a debtor’s account represents proceeds of assets protected under Florida law such as annuity proceeds or retirement distributions. Unless banks are required to make reasonable inquiry about the source of debtor’s funds some  creditors use bank garnishments against exempt money as an harassment tool as opposed to a legitimate collection tool.
 

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Creditors cannot garnish wages of Florida resident who is head of household. Wages earned by the spouse who is not head of household is subject to garnishment. Sometimes clients ask me what compensation is included in the definition of "wages" which are either exempt or are subject to garnishment.

This week I met with a married joint debtors. The husband debtor had a job and his income supported the family. The wife debtor has lost her job and was receiving unemployment compensation from the government. The couple understood that the husband’s wages were exempt, but he wanted to know if the joint creditor could garnish unemployment benefits paid the wife debtor. If unemployment income is a form of wages then it logically could be garnished.

Unemployment benefits may be income for tax purposes but the payments are not wages subject to garnishment. Florida Statute 443.051 states that any unemployment compensation payable under state law may not be assigned and are exempt from all creditor claims.

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The Florida statutes exempt retirement pensions from creditor claims. Courts have protected pension distributions after they were deposited in financial accounts. This week a Florida resident with an English accent called me with asset protection questions. On of his assets is a pension from an English company which he earned while working for many years in England. He assumed that his English pension is safe from creditors. I told him I disagreed, and that I think his creditors could garnish the pension ( they may have to go to England to do so), or his creditors could levy upon pension payments after they were deposited in a U.S. checking account. Why is an English pension not a protected pension?

The Florida statutes do not include a blanket exemption of all pension and retirement accounts as they do for all annuities. The applicable statute exempts only those statutes authorized by a list of specific Internal Revenue Code sections. The list of Code sections applies to certain retirement plans which are tax deferred under the Code. The U.S. revenue law has no tax deferral provisions for retirement plans established in other countries under their own tax laws. Pension plans set up pursuant to England’s tax law are not referred to in Florida’s laws, and therefore, this caller’s English pension and the payments therefrom are not exempt in Florida.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

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