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

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Can a debtor protect a future legal interest in his primary residence under Florida homestead laws? In this bankruptcy case a debtor’s mother owned a property where the mother and the debtor resided with the debtor’s spouse and children. The mother executed a deed transferring title to the debtor reserving a life estate to the mother. (A "life estate" means the mother owns and controls the property and as long as she is alive). The debtor’s mother was old with a short life expectancy.

The debtor filed Chapter 7 bankruptcy and claimed his future legal interest in his mother’s house as an exempt homestead asset. The trustee objected to the debtor’s exemption because the debtor’s interest in the property was only a future "remainder interest" (meaning the debtor has no vested ownership until the mother dies). The trustee wanted to take and sell the debtor’s interest in the house which would vest upon his mother’s death in the reasonably near future.

The court said that the debtor’s future ownership rights was protected under Florida’s homestead laws. The court pointed out that the debtor occupied the home with his family as a family residence, and that the debtor contributed financially to the repairs and upgrades to the house. The court held that the debtor’s present right of possession is sufficient to qualify the house as an exempt homestead. In re: Williams Case No. 3:09-586.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Exempting wages from garnishment under Florida’s head of household exemption is difficult for self-employed debtors. Business owners of sub-S corporations typically compensate themselves as employees and as owners. The owner pays himself salary as well as profit distributions. Self-employed business owners limit salary in order to minimize employment taxation, and instead, pay themselves mostly through profit distributions. This compensation arrangement raises issues when the self-employed owner tries to exempt his salary under Florida Statute 222.11 which exempts earnings paid to debtors who are head of household.

Many years ago, in the mid-90s, some bankruptcy courts denied the earnings exemption to self-employed business owners on the grounds that they did not pay themselves in a manner consistent with an employer-employee relationship. The issue just recently was addressed by a bankruptcy court in Florida’s middled district. (In re McDermott, 425 R.R. 848). At issue was an exemption of the debtor’s money in a self-described wage account funded with money received from the debtor’s wholly owned business.

The bankruptcy court denied this debtor an exemption for money in a bank account which the debtor had claimed as exempt wages. The court said the debtor’s compensation history and practice was inconsistent with that of an arms-length employee and employer relationship. The record showed significant variation in the timing and amount of the debtor’s claimed wages. The debtor substantially increased his wages in the months leading up to his bankruptcy in an apparent effort to exempt the money in a wage account. The pre-bankruptcy wages were almost twice the amount he received total in the prior two years. The debtor had complete control over distributions from his business and had no written employment agreement with his corporation.

The court held that, "A debtor who owns and runs his own business, without an arms-lenght employment agreement, and who has almost complete control and discretion over the timing and amount of his own compensation cannot rely on Section 222 (wage exemption statute) to exempt the funds."

This ruling is consistent with the analysis in the above-mention 1990s cases on the same issue. Self-employed business owners will find it difficult, not impossible, to take advantage of Florida’s head of household earnings exemptions. First, the debtor must pay himself consistent the same salary regardless of variation in business expenses and income. Second, there must be a written employment agreement whose terms are consistent with actual compensation. The owner must pay his wages in the same manner, albeit different amounts, that he pays his unrelated employees. Only then does the business owner have a viable argument that part of his total compensation is exempt wages to a head of household debtor.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A client asks: " doesn’t the creditor have to find out if I’m head of household before they garnish my wages." In other words, is your creditor obligated to check out your exemptions before taking action to collect a judgment? The general answer is: "no."

Florida law does not require a judgment creditor to investigate and negate possible exemptions prior to making attempts to execute upon their judgment. In this clients case the creditor legally can serve a wage garnishment on the employer. The debtor has the burden of asserting head of household exemption and dissolving the garnishment in court. The same rule applies to garnishment of an exempt entireties account. The creditors writ of garnishment will freeze the account until the debtor takes action to dissolve the garnishment. In most cases, the debtor will need to pay an attorney if he wants the garnishment of an exempt asset removed quickly.

Florida law provides valuable exemptions; the law does not guarantee that the exemptions are self-executing or free.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A judgment creditor cannot garnish wages of a Florida domiciled debtor who is head of household. Assume, that a creditor sues the Florida resident in Georgia and gets a money judgment against a Florida resident based on a transaction in Georgia. . During the proceeding, the debtor was a full time resident of Florida and worked in Florida. The employer had an office in Georgia, but it paid the debtor his salary in Florida. Do you think that the Georgia creditor can garnish the wages in Georgia at the employer’s Georgia address, or can the debtor assert his Florida wage exemption because he is a Florida citizen?

Similarly, suppose the Florida debtor had lived previously in Georgia many years ago, and that when he Georgia he opened an annuity investment account at the Georgia office of a national finance company. Surely, Florida statutes exempting IRA from creditor levy would protect the debtor’s IRA account.

The Florida statutory exemptions will not protect the debtor in Georgia. The Georgia creditor can garnish his wages paid in Florida and his annuity to the extent either are not otherwise exempted under Georgia laws. There is a general rule of law that exemptions cannot be exported, so that most courts in other states will not recognize exemptions afforded to Florida residents. In other words, exemption laws have no extraterritorial effect.

Courts do recognize judgments and contracts from other states under the principal of "comity." Several courts have stated a general rule that the rule of comity among states extends only to rights and not to creditor remedies; rights are substantive while remedies are procedural.

Asset protection for Florida residents must guard against enforcement of judgments in other states’ courts when another court has jurisdiction over either the debtor personally or property of the debtor located in another state.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Asset protection planning deals mostly with civil money judgments. When it comes to family law, there are fewer asset protection options available to avoid awards of alimony and support of a former spouse. For example, judges in divorce cases can order an allocation of retirement accounts which are exempt from regular judgment creditors. The homestead exemption is the strongest asset protection tool, but does it work equally well in a family law context. A caller asked me whether a court can force the sale of a former spouse’s homestead property to pay court awarded child support or alimony.

There is at least one case which held that a spouse could force the sale of a homestead to enforce a support order. In that case, the court reasoned that the purpose of the homestead protection is to protect the debtor’s family, and that the debtor cannot hide behind the homestead shield to the detriment of those family members it was designed to protect.

More recent decisions have held that there is no alimony or support exemption to homestead protection. If the creditor spouse can demonstrate that the spouse who owns the homestead property acted fraudulently, reprehensibly, or egregiously to acquire or use the homestead exemption to avoid paying an alimony or support order then the court could impose an equitable lien on the homestead property. However, I think most courts will agree that a former spouse cannot force the sale of homestead to fund an alimony or support obligation.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

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

• Email This
• Print
• Comments
• Trackbacks
• Share Link

The state of Massachusetts is serious about collecting corporate income taxes. An owner of a bankrupt Massachusetts corporation learned about Massachusetts corporate tax collection when he tried to renew his Florida drivers’s license. At attorney wrote me an email about one of his clients who was a principal owner of a Massachusetts corporation doing business in that state. The business owed corporate taxes to the state. The client owner owed no personal taxes. The attorney’s client resides permanently in Florida.

Massachusetts law enables the state to suspend your driver’s license if you don’t pay state taxes. The law makes principal owners of a corporation liable for the corporation’s income tax. After this client’s corporation filed bankruptcy owing state corporate income tax the state of Massachusetts listed the individual principal on a national registry of corporate tax deadbeats. It turns out that Florida checks the national registry, and our state respects suspensions imposed by other states for tax liability. This unsuspecting owner of a failed Massachusetts business finds himself unable to drive in Florida or Massachusetts until he pays his bankrupt corporation’s state income tax.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

Effective asset protection planning requires anticipation of what creditors’ attorneys may and will do to collect their judgments. The best way to learn creditor attorney strategy is to ask them. My social relationships with creditor attorneys are very valuable to me professionally, as well as personally, because they give me the opportunity to learn about their methods.

I recently had a lunch with one of Orlando’s preeminent collection lawyers. We discussed collection practices and asset protection strategy, and I found some of his comments to be interesting. I asked him what was the most effective debt collection tool. His answer was, without hesitation: bank account garnishments. Bank garnishments, he explained, was the only way to capture a significant amount of a debtor’s cash quickly and without lengthy legal proceedings. Bank accounts are where the money is. Bank garnishments strike a surprise blow to debtors which freeze their funds and usually force them to settle the remaining debt.

I next asked him whether wage garnishments were effective assuming the debtor is not head of household. He said that garnishments were not a good collection tool. First, the creditor collects small amounts of money each month toward the judgment, and his clients are not interested in long-term payback. Next, he explained, that wage garnishments usually force debtors to file bankruptcy because debtors will not work for an indeterminate future for the benefit of creditors. Wage garnishment, he felt, usually backfire against his clients' debt collection.

Many of my clients spend much time asking about charging liens a creditor could get against their LLC which operates their small business. This creditor attorney has not sought a single charging lien for many years. He cannot recall the last time he used a charging lien. From the creditor perspective, he explained, charging liens are ineffective against an LLC business managed by the debtor or the debtor’s family. The attorney explained that charging lien collection against a closely held LLC depends upon the honesty of the debtor; the creditor collects money only if the debtor voluntarily reports an LLC distribution subject to the lien. He found that most debtor LLC owners circumvent the charging lien with salary and loans, and that neither he nor his clients are able to monitor effectively the Debtor LLC distribution practices. It seems that an LLC properly formed and clear of fraudulent transfer challenges is practically a very effective asset protection too.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

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

• Email This
• Print
• Comments
• Trackbacks
• Share Link

An attorney asked me for my opinion about his debtor client who was put on the legal title to his parents’ house. His mother and father added the client, their only son, to their homestead deed as a joint tenant with rights of survivorship for estate planning purposes. When both parents die the title automatically passes to the surviving son. (Title would vest in the son anyway under Florida’s homestead laws without the son being on title.). The parents paid off the mortgage. The son never paid any money toward the purchase or maintenance of the parent’s house. The son does not live in the house with his parents. One of the son’s creditors got a civil judgment against him. The attorney wants to know if the son’s creditors can levy upon the son’s interest in the house and force a sale of the home.

I’ve advised many times in this blog that parents should not add their children to their property titles because a judgment against the child could jeopardize the parents’ assets. This is another example of that risk. However, in this case I think the parents’ house is safe. Because the son has invested no money in the house nor given his parents any consideration for putting his name on the title the son has no equitable interest in the house. He has what is called “bare legal title.” The son has no right to money received from the sale or financing of the house, and his creditors can gain no greater rights than the son holds in the property. I think a judge would recognize that the son is on the title as an estate planning device and that the parents did not intend a present gift of any interest in or rights to the house. The creditors cannot get what the debtor does not have- I think the house is safe.

But, there are many ways this type of planning can turn out badly. There certainly is no guarantee a judge will rule the same way I interpret this transaction. As a practical matter the parents have put their homestead at risk. This family engaged in amateur estate planning without legal advice. Penny wise, pound foolish.
 

 

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

• Email This
• Print
• Comments
• Trackbacks
• Share Link

A client asked me two homestead questions which questions I have previously heard from other clients or email inquiries. This client owned a homestead with significant equity within a municipality. Homestead properties within a city up to ½ acre in lot size are protected under the Florida Constitution. The client said he intended to buy a ½ acre lot adjoining this existing homestead as an investment, and he wanted to know if the lot would be protected from creditors. My opinion is that the lot purchase would jeopardize the homestead protection of his existing house. Homestead includes the property upon which your residence is located as well as all contiguous land. If the client purchased the adjoining lot and took title in his own name the adjoining lot would be incorporated into his homestead and the size of his entire homestead would increase from ½ acre to a full acre. Thereafter, only 50% of the total homestead would be protected within the city limits. The client could not apportion protection to the original lot on which the house is situated. The purchase of the contiguous lot in his own name would forfeit protection of 50% of his house value. A better strategy would be to form a limited liability company and have the LLC purchase the adjoining lot. Because the client does not personally own the new lot it would not add to the size of his homestead. Land owned by entities, as opposed to natural persons, cannot be homestead property. The LLC would give some, although imperfect, asset protection.

 

The second question concerned the bankruptcy rule that requires a bankruptcy debtor to own a homestead property for 40 months in order to get unlimited homestead protection in bankruptcy court. If a debtor owns homestead 1, sells homestead 1 for a profit, invests the profit in homestead 2, and then files bankruptcy, the time of homestead includes ownership of homestead 1. A client posed the following question: the client owned homestead A for many years. During the real estate crash he did a short-sale of homestead A and immediately purchased homestead B with new money. The client believes that since he can continuously owned a Florida homestead, including A and B, for more than 40 months he should have unlimited homestead exemption in homestead B. I don't think the law is intended to add the ownership period of homesteads A and B in this example because no equity from A was invested in B. Ownership periods are grandfathered when the debtor transferred equity (sales proceeds) from one homestead to a new homestead. Investment of money other than homestead sales proceeds begins anew the ownership clock for purposes of the Florida homestead exemption- that's my interpretation.

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

• Email This
• Print
• Comments (2)
• Share Link

I dealt with an interesting question today about alimony and support questions. Sometimes people ask me if there are asset protection tools to guard against awards for payment of alimony or support (generally, the answer is "no") or what types of assets are vulnerable to enforce family court judgments. Today's issue was different. A divorced woman was facing a large civil judgment. The divorce court awarded the woman alimony, and her ex-husband sent her monthly alimony checks. The woman depended upon the alimony to pay her basic costs of living. She wanted to know if a judgment creditor could garnish the alimony payments from the ex-husband.

Florida statute Chapter 222 which lists the asset exemptions applicable to Florida residents does not include an exemption for alimony or support. There is no exemption in the Florida constitution nor under federal law. Florida courts, however, have protected alimony and support from garnishment. One court held that alimony was not the type of debt or obligation subject to garnishment, and that public policy calls for the protection of alimony and support. See Waters 547 So 2d 197 . At least one bankruptcy court recognized this garnishment exemption.

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

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link