FL. Asset Protection

Florida Asset Protection Planning

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ASSET PROTECTION Asset protection is a process of protecting estate assets against attack by creditors. A well-designed asset protection planbuilds a protective fort around the client's estate and guards family wealth from external creditor attack. The most effectiveasset protection fortress contains multiple layers of protection, so that even if a creditor can defeat one protective device, there are other impediments to the creditors attack which surround the family’s nest egg. Asset protection is, therefore, a fundamental building block of estate planning. Constitutional Asset Protection Under the Florida Constitution one’s home is truly his castle, a castle that is impenetrable by creditors. Florida courts have liberally expanded definitions of homestead property which legally includes more than just a single family house. Condominiums are afforded full homestead protection as are almost any other type of primary residence such as a manufactured home or even a mobile home. In whatever form, a person’s equity investment in his primary residence cannot be seized by a creditor for any reason. Article 10, Section 4(a)(1) of the Florida Constitution protects a person’s homestead residence from forced sale under process of any court. That section clearly states that no judgment or execution shall become a lien on homestead property. The Constitution defines homestead as one’s principal place of residence up to one-half acre within a municipality and up to 160 contiguous acres in any county in Florida. To qualify for homestead protection, a debtor must be a Florida resident and must reside on the homestead property. What makes Florida’s homestead protection such a powerful asset protection feature are it’s geographical scope and its unlimited monetary protection. So long as a person’s primary residence is located outside the geographical limits of a municipality, the constitution protects homestead properties up to 160 contiguous acres. All property contiguous to the primary residence is under the homestead umbrella, even if the property comprises multiple lots and separate legal descriptions. A Florida resident can invest millions of dollars in large estate homes and farms and protect the full value of these luxury residences under the protection of Florida’s homestead provisions. The most noteworthy feature of Florida’s homestead law is its lack of any monetary cap on homestead protection. While many states around the country have homestead protection in their law, almost all other states have some level of valuation limit of homestead protect. Common Law Asset Protection: Tenants by Entireties Common law refers to law established through the precedent of case decisions by judges. Common law decisions in Florida, and in many other states, have afforded creditor protection to property which is jointly owned by a husband and wife as tenants by entireties. Any two individuals may own property, real or personal, as joint tenants with rights of survivorship. Either joint tenant may sell or alienate his interest in the joint property while both joint tenants are alive. After the death of one joint tenant, ownership is vested by operation of law in the surviving joint tenant(s). Because a joint tenant can voluntarily dispose of his property while he is alive, a creditor is able to execute on a joint tenant’s interest to satisfy the debts of such individual joint tenant. Married persons may own property as joint tenants with rights of survivorship. In fact, most married couples purchase and own their assets in this form. Bank accounts and financial instruments owned by married persons are often designated as being owned jointly with rights of survivorship. A creditor of either spouse may seize the interest the debtor spouse holds in joint tenant property. Courts will presume that the debtor spouse owns a 50% interest in joint tenant property unless the facts demonstrate a different allocation of ownership. If the creditor seizes the debtor spouse’s interest, the creditor would become a tenant in common with the non-debtor spouse. Unlike joint ownership with rights of survivorship, tenants by entireties ownership affords asset protection benefits. Tenants by entirety (“TE”) is a special form of joint tenancy ownership which is available only to married persons under the common law. This common law concept relates back to 18th century English concepts that a husband and wife were joined as a unit which unit is separate and distinct from either spouse acting individually. The tenancy by entirety is, conceptually, a separate entity of ownership which can act only with the consent of both spouses. While tenants by entireties has been abolished in England, it survives under the common law of many jurisdictions in the United States, including Florida, where it is well established in a long line of Florida case law decisions. Both tenants must join in any transfer or alienation of TE property, and one spouse cannot transfer his interest in TE property without the joinder of the other spouse. A creditor of one spouse cannot seize involuntarily an interest in TE property which the spouse cannot transfer voluntarily. Therefore, a creditor of a single spouse cannot involuntarily seize property held by the debtor as tenants by entirety with his spouse. In the case where both spouses are jointly indebted to a particular creditor, that creditor can involuntarily seize TE property owned by the two spouses. TE protection exists only if a creditor has no rights against one of the spousal owners. Any type of property, including all real property, tangible personal property, and intangible personal property, may be owned by a married couple as tenants by entireties. Whether a married couple owns property as joint tenants with survivorship or as tenants by entireties depends on the intent of the spouses. Married couples in Florida must formulate and also demonstrate their affirmative intent to own a joint property by the entireties in order to place the subject property under the umbrella ofasset protection. In the case of real property the Florida courts presume that property titled jointly between a husband and wife is intended to be owned as tenants by the entireties unless a husband and wife clearly show their intent to disclaim entireties ownership or their intent to own propery in a different manner. Even where the deed to property does not state “tenants by entireties”, Florida courts presume that the real property is owned TE so long as the husband and wife are both listed as owners and no alternative form of ownership is designated on the face of the deed. For this reason, even where a husband and wife jointly own non-homestead property, that property will be protected against the creditors of one spouse on the theory that the property is owned by the entireties. For married persons, TE is attractive because it is the quickest and simplest form of asset protection against the creditors of either spouse individually. This form of ownership, however, does not provide secure asset protection over the long term. First, a divorce between the spouses immediately converts the TE into a joint tenancy between the two former spouses. In that case, the assets of the debtor spouse would immediately be exposed his or her creditors. Likewise, a death of one spouse terminates the TE and vests the property solely in the surviving spouse. If the surviving spouse has creditors, the protection afforded by the TE ownership is lost. Secondly, TE ownership creates problems in the areas of estate planning and estate tax avoidance. A married couple that owns most of their assets as TE may lose the ability to take full advantage of each spouse’s estate tax credit. This happens because, upon the first spouse’s death, all TE property passes to the surviving spouse by operation of law. Another estate planning disadvantage of TE ownership is that when the first spouse dies, he or she loses the ability to control the ultimate disposition of TE property. This occurs because the surviving spouse becomes the outright owner of the property on death and thereafter has the power to control the ultimate disposition of the property. Statutory Asset Protection The greatest number of asset protection weapons is contained within the Florida Statutes. Over the years, the Florida legislature has established numerous classes of assets which are statutorily exempt from claims of creditors. Salary or Wages. Wages, earnings or compensation of the head of household which are due for personal labor or services, including wages deposited into a bank account, provided they are traceable and identified as such, are exempt from garnishment under Section 222.11 of the Florida Statutes. Effective October 1, 1993, Florida limited this exemption to $500 per week of net disposable earnings. Disposable earnings are defined as that part of earnings of a head of household remaining after the deduction of amounts required by law to be withheld. If gross wages an salaries in excess of $500 per week are protected under the statutes so long as the net disposable earnings which the wage earner takes home is less than $500 per week. Even the excess over $500 per week of disposable earnings cannot be attached unless the debtor agrees in writing. Thus, from a practical standpoint, the vulnerability of head of household wages applies only to the extent that a creditor requires a debtor to waive protection of his excess earnings in return for the extension of credit. Life Insurance Policies and Annuity Contracts. Insurance and other financial products are protected from creditors’ claims by Florida Statutes. These statutory exemptions make it possible for clients to invest well in financial products which afford asset protection as well as financial planning and tax planning and tax planning benefits. One class of protected financial investments is life insurance. Section 222.13(1) of the Florida Statutes provides as follows: "Whenever any person residing in this state shall die leaving insurance on his life, the said insurance shall inure exclusively to the benefit of the person for whose use and benefits such insurance is designated in the policy, and the proceeds thereof shall be exempt from the claims of creditors of the insured...” Notwithstanding the foregoing, whenever the insurance, by designation or otherwise, is payable to the insured, his estate, or to his executors, the insurance proceeds shall become a part of the insured’s estate for all purposes and may be subject to claims by the creditors of the deceased. In other words, where a debtors owns insurance on his own life and designates the beneficiary of said policies, upon the debtors death, the full death benefit shall be paid to the designated beneficiaries and shall be protected from the claims against the deceased. While a Florida resident is alive, the cash value of any insurance policy he owns on his life or on other Florida residents is exempt from creditors claims. This exemption is true whether the policy is issued on the life of the owner or upon the life of a third party provided the third party is a resident of the State. Florida Statute 222.14 provides “(t)he cash surrender values of life insurance policies issued upon the lives of citizens or residents of the state... shall not in any case be liable to attachment, garnishment or legal process in favor of any creditor of the person whose life is so insured..., unless the insurance policy... was affected for the benefit of such creditor.” The protection afforded to the cash surrender value of a life insurance policy is only for the benefit of the owner/insured of said policy. Perhaps the most popular financial products for asset protection planning are annuities. Florida Statute 222.14 provides that proceeds from an annuity contract issued to residents of Florida are not subject to attachment, garnishment or legal process in favor of any creditor of the beneficiary of the contract, unless the annuity contract was effected for the creditor’s benefit. Florida courts have liberally construed this statutory exemption to include the broadest range of annuity contracts and arrangements. Private annuities between family members are entitled to the exemption as are the proceeds of a structured personal injury settlement deposited into the debtor’s bank account. Bankruptcy court decisions in Florida have held that lottery winnings are exempt from levy if the winnings are paid in the form of an annuity to the recipient. Because of their relatively high interest rates, safety, an tax deferral features, annuities are a favored asset protection vehicle in Florida. There is no dollar limitation on the amount of assets which can be sheltered from creditors in the form of annuities. Pension and Profit Sharing Plans, IRAs. To prepare for retirement and to defer income taxation, more and more individuals, whether they be economically middle class or affluent, direct significant wealth into IRA accounts and other qualified retirement plans. In Florida, retirement money not only avoids current income taxation, but is protected from creditors as well. Florida Statute 222.21(2)(a) provides that any money or other assets payable to participant or beneficiary in a qualified retirement or profit sharing plan is exempt from all claims from creditors of the beneficiary or participant.

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FLORIDA ASSET PROTECTION - Homestead Protection In Florida, our home is truly our castle, a castle that is impenetrable by creditors. The Florida Constitution exempts homestead property from levy and execution by judgment creditors. Florida courts have liberally expanded definitions of homestead property which includes more than just a single family house. Condominiums, manufactured homes, and mobile homes are also afforded homestead protection. The Constitution defines homestead as one’s principal place of residence up to one-half acre within a municipality and up to 160 contiguous acres in any county in Florida . To qualify for homestead protection, a debtor must be a permanent Florida resident and the homestead property must be his primary place of residence. Property purchased as a future residence is unprotected until the property is occupied as a principal residence. A second home or investment property cannot be considered a Florida homestead. Only "natural persons" quailfy for homestead protection so properties titled in the name of irrevocable trusts, corporations, limited liability companies, or partnerships will not qualify. Property owned by a living trust can be homestead property. A newly-enacted Florida Statute provides that property owned by a land trust may be homestead property. The Florida Constitution does not protect homestead property against tax liens, mortgages, homeowner association assessments, or from mechanics liens associated with labor or materials to repair or improve the homestead property. Also, the asset protection benefits of homestead should not be confused with the homestated tax exemption; the tax exemption and creditor exemption are similar but different rules can apply to each. Homestead protection may not apply if the debtor files bankruptcy. Under the new bankruptcy law, homestead protection is available in bankruptcy up to $137,000 unless the debtor occupied his current Florida homestead property and previous Florida homestead properties for a continuous 40-month period. Joint bankruptcy debtors can protect $274,000 of jointly owned homestead. Also, transfers of cash into homestead within 10 years intended to defraud creditors may be challenged by the bankruptcy trustee. The new bankruptcy law has no effect on Florida's unlimited homestead protection outside of bankruptcy. _________________________________________________________ ASSET PROTECTION 10 Biggest Mistakes in Asset Protection Planning Not Understanding the Purpose of Asset Protection: Asset protection will not make you “judgment proof.” Waiting Too Long To Begin Planning: Preventive planning is both most effective and least expensive before you have legal problems. Believing That It Is Too Late To Protect Assets: Its never too late to improve protection. Anything is better than doing nothing. Thinking Creditors are Stupid or Lazy: Don’t underestimate the skill and intelligence of your adversaries. Creditors and their attorneys are not stupid. Hiding Assets : There are no longer any secrets in this world. You cannot hide assets, offshore or anywhere else, to protect the assets from creditors, the IRS, or former spouses. Fraudulent Transfers and Conveyances: You cannot protect assets by giving them to family members. Misunderstanding Salary Exemption: Traps for single business owners. Confusing Estate Planning With Asset Protection: Asset protection is part of estate planning, but a living trust or self-settled irrevocable trust does nothing to protect your assets from creditors. Confusing Bankruptcy Law and Asset Protection Law: The new bankruptcy law does not affect Florida's unlimited homestead exemption and other exemptions outside bankrutpcy court. Giving Up Control Over Your Assets: The easiest asset protection plan is to give someone else control over your wealth. This is not a good solution.

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ASSET PROTECTION - Fraudulent Conveyances Fraudulent Conveyances What are fraudulent transfers and conversions? The most important issue in any asset protection plan is whether or not previous planning transactions constitute fraudulent transfers or fraudulent conversions (collectively, “fraudulent conveyance”) as defined by Florida Statutes. A fraudulent transfer is a debtor’s transfer of legal title to his real or personal property to a third party with the intent to hinder, delay or defraud a present or future creditor. A fraudulent conversion is a debtor’s conversion of non-exempt real or personal property subject to creditor attack to a different type of property, still owned by the debtor, which new property is exempt or immune from creditor attack. Florida Statues provide that a creditor can sue to overturn a transfer or conversion up to fours years after a conveyance was made or obligation incurred. Asset protection planning and transfers become immune from fraudulent conveyance suspicion four years after the planning takes place. What is the consequence of making a fraudulent transfer or conversion? Florida Statutes provide courts equitable remedies to undo fraudulent asset protection planning. Fraudulent transfers or conversions may be undone and reversed by a court’s putting the property back in the debtor’s hands where the property becomes subject to the creditor collection process. The Statutes provide several equitable remedies to assist the creditor’s collection of these converted assets including injunctions against further transfers, imposing a receivership on the assets, or imposition of a constructive trust. A creditor alleging fraudulent conveyance may sue not only the debtor transferor but also the transferee who received the property in order to undo the transfer. Consequently, a fraudulent transfer to a friend or family member is likely to make that friend or family member a defendant in a creditor’s fraudulent transfer lawsuit. Fraudulent conveyances are not prohibited and are not illegal. The subject statutes do not provide for awards of additional damages against the debtor, and the statutes certainly do not impose criminal fines or penalties. Florida courts interpreting these statutes have pointed out that a debtor’s monetary liability cannot be increased because the debtor made a transfer or conversion later determined to be a fraud against present or future creditors. What makes a transfer or conversion a fraud against creditors? Not all transfers or conversions which move assets beyond a creditor’s reach are fraudulent and subject to reversal. Whether or not a transfer or conversion is intended to hinder, delay, or defraud creditors depends on the debtor’s purpose and his intent behind the transfer or conversion. To ascertain the debtor’s purpose and intent of a property transfer courts look to factors which are often indicative of intent to avoid creditor claims. For example, a court will examine whether any particular transfer was made to a debtor’s family member; whether a transfer was concealed; whether the debtor retained effective use or control over the property transferred; and, whether the transfer rendered the debtor insolvent. All of these above factors suggest that a transfer was a fraudulent conveyance which the courts should reverse. Defense against fraudulent conveyance allegations. When a creditor is trying to collect money from a debtor who has previously engaged in asset protection planning and has little or no assets easily subject to creditor collections a creditor will almost always institute an action attacking one or more of the debtor’s prior transfers as fraudulent transfers or conversions. Just because a creditor believes a conveyance was intended to defraud creditors does not mean a court will set aside the conveyance. A debtor can show many legitimate reasons to convey assets other than avoiding creditors. How the fraudulent conveyance issue impacts asset protection planning? Just the possibility of a creditor’s allegations of fraudulent conveyance should not deter aggressive asset protection planning prior to time a judgment is entered by a court. People have a constitutional right to control or transfer their property until such time as a judgment creditor obtains a legal interest in the property. This is why the applicable statutes do not prohibit or make illegal fraudulent conveyances. Because a court cannot increase the amount of the judgment damages already awarded against a debtor because of a debtor’s fraudulent conveyance, there is little or nothing to lose by planning to protect your property even if some planning might be subsequently challenged or even reversed. ________________________________________________________________ Becoming a Florida Resident for Homestead Protection Many people from all over the country who have current or potential legal problems are interested in moving to Florida to take advantage of Florida's homestead protection and other asset protection laws. It is never too late to move to Florida to obtain protection from civil liability. Even after a judgment is entered against you in another state, one may legally become a Florida resident and protect money invested in a new Florida homestead property. There are no civil or criminal penalties for moving to Florida when one is being sued somewhere else or when one has a civil judgment against them in another state. A possible complication exist if another state's court has issued an injunction against transfers of assets. In order to protect money in a Florida homestead property or in other assets protected by Florida law one must become a Florida resident. Residents of other states who buy real estate in Florida cannot protect that real estate under Florida's homestead laws. Moving to Florida requires severing ties to the state where you moved from. For example, you should sell your current residence , turn in your drivers license, and close your bank accounts in your current state. At the same time, you would purchase or rent a primary residence in Florida and take other steps to become a Florida resident. Some people rent first to establish residency why they search for a homestead to purchase. Requirements for Florida residency are explained elsewhere on this website. Protection of Florida homestead is effective immediately. After purchasing a Florida homestead and moving one's belongings into the homestead the homestead is immediately protected from creditors as long as other facts and circumstances show intent to make the new homestead a permanent home. There is no waiting period before Florida's homestead protection takes effect to protect the debtor's assets against existing creditors. There may be a two-year waiting period before a debtor can file bankruptcy in Florida and a longer waiting period before homestead is protected in bankruptcy. The new bankruptcy law extends the waiting period to 40 months for homestead equity over $125,000. Florida homestead law is explained in greater detail elsewhere on this website. _____________________________________________________________ FLORIDA ASSET PROTECTION - Joint Ownership Most married persons own property as joint tenants with rights of survivorship. Upon the death of one spouse, ownership is vested by operation of law in the surviving spouse. Many married people incorrectly believe that their jointly owned property is protected from their creditors. This belief is incorrect. Joint ownership with rights of survivorship offers no asset protection. A creditor of either spouse may seize the interest the debtor spouse holds in joint tenant property. Unlike joint ownership with rights of survivorship, “tenants by entireties” ownership affords excellent asset protection benefits. Tenants by entirety is a special form of joint tenancy ownership which is available only to married persons. Some states have statutes that define and protect tenants by entireties property. In Florida, tenants by entireties protection has been established by judicial decisions interpreting the common law. Under Florida judicial law, in order to qualify as tenants by entireties property, the property in question must have certain characteristics: joint ownership and control, identical interest in the property, the interest must have originated in the same instrument, the interest must have commenced simultaneously, the parties must have been married at the time they acquired the property, and the surviivng spouse will own the property after either spouse dies. In the case where both spouses are jointly indebted to a particular creditor, that creditor can involuntarily seize tenants by entireties property. Tenants by entireties protection exists only if a creditor has a claim against only one of the spousal owners. Most states with entireties protection afford the protection only to real property. In Florida, unlike most other states, all types of property, including all real property, tangible personal property, and intangible personal property, may be owned by a married couple as tenants by entireties. Whether a married couple owns property as unprotected joint tenants with survivorship or as protected tenants by entireties depends on the intent of the spouses. The Florida Supreme Court has said that any real or personal property owned jointly by a hustand and wife is presumed to be owned as tenants by entireties. A creditor could rebut this presumption by showing that the property ownership does not possess all six entireties characteristics or that the husband or wife indicated an intent to own the property in some other manner. In Florida, tenants by entireties is the quickest and simplest asset protection for married persons. This form of ownership, however, may not provide secure asset protection over the long term. First, a divorce between the spouses immediately converts the tenants by entireties into a joint tenancy between the former spouses. In that case, the assets of the debtor spouse would immediately be exposed his or her creditors. Likewise, a death of one spouse terminates the tenants by entireties and vests the property solely in the surviving spouse. If the surviving spouse has creditors, the asset protection afforded by the tenants by entireties ownership is lost. Secondly, tenants by entireties ownership creates problems for estate planning and interferes with estate tax avoidance. ________________________________________________________________

FLORIDA ASSET PROTECTION - Partnerships / LLC There are two asset protection tools which have substantial benefits for estate planning as well as asset protection. These are the limited partnership (LP) and the limited liability company (LLC). A limited partnership is a partnership consisting of two classes of partners, general partners and limited partners. A general partner has general liability for all partnership debts, and he has the responsibility and authority to manage partnership business. The general partner controls the partnership’s investments, distributions, and other business decisions. A limited partner has an investment interest in the partnership, and he plays a passive role in partnership business. An individual can be both a general partner and a limited partner in an LP. A limited liability company is a business entity created pursuant to Chapter 608 of the Florida Statutes. An LLC is controlled by a manager. The manager directs the LLC’s business affairs and determines the amount and timing of cash distributions. The investment interest in an LLC is held by members. Members invest the initial capital in the limited liability company, and they incur gains or losses from the LLC’s business. An individual can be both a manager and a member of an LLC. An LP interest and a membership interest in an LLC are both intangible property and both types of interest are assignable and transferrable subject to restrictions of the LP agreement or the LLC operating agreement. Asset Protection Benefits of a Partnership or Limited Liability Company A limited partnership and a limited liability company offer the same degree of asset protection. The investment interests in an LP or LLC are not “exempt” from levy by creditors of the limited partner. There is no constitutional or statutory provision in Florida which protects a limited partner’s or an LLC’s member’s investment. Asset protection is available by virtue of the limited procedural remedy given to creditors to levy upon a debtor's limited partner interest and an LLC membership interest. A creditor has no right to seize property within a partnership or an LLC to satisfy the debt of a partner or member. Moreover, in a properly drafted LP agreement or LLC agreement, a creditor has no right to vote or inspect the books and records of the LP or LLC. Under Florida law, a creditor’s rights are limited to receiving distributions of cash or other property made from the LP or LLC to limited partners or LLC members. In most closely held business arrangements where one partner or member has a creditor problem, a cooperative general partner/manager will retain profits inside the LP/LLC and make no distributions which might be taken by a lurking creditor. If the general partner/manager does not order distributions of cash or property, then the creditor gets nothing. In addition, a creditor with an active charging lien may incur income tax liability. A 1997 Revenue Ruling suggests that where a creditor has a charging lien on an LP or LLC interest and the general partner/manager does not distribute partnreship income, the creditor, not the limited partner/member, is responsible for paying the tax on allocated income. The charging lien may become a "poison pill" as long as the creditor receives no money but incurs income tax liability in his effort to collect a judgment debt. One practical limitation with the limited liability company and partnership charging lien protection is that cash and assets can remain trapped inside the entity by a "patient creditor" holding a charging lien. Even though the creditor cannot get assets inside the entity, neither can the member or limited partner get these assets because any attempted distribution would be seized by the charging lien. A member or limited partner may need access to cash from the entity to maintain a normal lifestyle. One solution is for the LLC/LP to pay the debtor a salary which is exempt from creditors if the debtor is head of household. Another solution is for the LLC or LP to purchase an annuity naming the debtor as a beneficiary. Florida courts have held that annuity payments remain protected after distribution and deposit in a bank account so long as the funds are segregated. Therefore, an LLC or LP should be able to distribute annuity proceeds to the debtor/beneficiary despite the existence of a charging lien. Some attorneys have questioned whether a single member LLC affords the same asset protection benefits of a multi-member LLC. The policy for limiting a creditor to the charging lien remedy as the exclusive collection remedy against a debtor's membership interest is preventing the creditor of one member from disturbing the ownership interest of other non-debtor members in LLC assets. In a single member LLC, the debtor's LLC has no other members, and the credtitor would not affect the ownership interest of any innocent membrers. Creditors have argued that a creditor should be able to seize and liquidate the membership interest of a single member LLC. To date, no Florida court has distinguished creditor remedies based on the number of members in an LLC. However, in May, 2008, a Fedreral Court of Appeals asked the Florida Supreme Court to consider and issue an opinion of whether Florida's statutory charging lien remedy applies to a single member LLC. ______________________________________________________________ OFFSHORE ASSET PROTECTION - Offshore Trusts Offshore trust planning is a highly-publicized method of asset protection. Offshore planning involves establishing legal entities in favorable foreign jurisdictions under the control of trustees who are neither United States citizens nor persons having a business presence in the United States. The purpose of offshore planning is to remove legal battles with creditors to jurisdictions beyond the reach of the United States courts. Offshore planning works, foremost, when an offshore jurisdiction does not recognize judgments rendered by U.S. courts. In order for judgment creditors to reach assets located in such jurisdictions, a creditor must start over and reinstitute the lawsuit against the same defendant in the foreign court system. The second advantage of offshore planning is that favorable offshore jurisdictions have relatively short statutes of limitation on fraudulent transfers. Domestic asset protection is often vulnerable to a creditor’s allegations that the debtor has transferred assets, or has recently converted a nonexempt asset to an exempt asset, in an effort to defraud or delay creditors’ collection. Most states have four-year statutes of limitations, which means that a creditor’s attorney can attack any asset transfers up to four years after the transfers took place. Favored offshore jurisdictions have two-year statutes of limitation on fraudulent transfers. The shorter statute of limitations makes it easier for debtors to defend creditor challenges of their asset protection planning. The favorite legal tool involved in offshore planning is the offshore asset protection trust which otherwise resembles a typical U.S. trust. The offshore trust is a “self-settled trust” where the settlor and the beneficiary are one and the same. In an offshore asset protection trust, the trustee is nominated by the settlor and the trustee is either an individual who is not a U.S. citizen or a trust company with no U.S. offices or affiliation. Most often, an offshore asset protection trust will have additional people serving as trust advisors or trust protectors. These are individuals not under the settlor’s control who have powers in the administration and protection of the trust and its assets but who have no beneficial interest in trust property. As a practical matter, the most important decision in forming an offshore trust is the selection of a trustee. The offshore trustee can be a bank or a lawyer in another country. The trust plan works best where the trustee is professional, reliable, and most importantly, willing to defend the offshore trust against attacks initiated by creditor attorneys. Offshore asset protection trust plans have been successfully attacked by recent court decisions. If the settlor retains control over the appointment of the offshore trustee, or if the trust protectors or trust advisors have the power to remove and replace the offshore trustee, a court may force either of these parties to dissolve the trust. If they refuse to obey the court, the judge can hold the settlor, trust advisor, or trust protector in contempt of court and can incarcerate them until they comply with the court's order. An offshore trust will be most effective if the debtor/settlor is willing to relinquish all control over the offshore trust and the offshore trustee, and if all parties to the trust other than the settlor are outside the jurisdiction of the United States. Offshore asset protection trusts are not designed to reduce or avoid U.S. income tax. _________________________________________________________________________________________ OFFSHORE ASSET PROTECTION - Offshore Trusts Offshore trust planning is a highly-publicized method of asset protection. Offshore planning involves establishing legal entities in favorable foreign jurisdictions under the control of trustees who are neither United States citizens nor persons having a business presence in the United States. The purpose of offshore planning is to remove legal battles with creditors to jurisdictions beyond the reach of the United States courts. Offshore planning works, foremost, when an offshore jurisdiction does not recognize judgments rendered by U.S. courts. In order for judgment creditors to reach assets located in such jurisdictions, a creditor must start over and reinstitute the lawsuit against the same defendant in the foreign court system. The second advantage of offshore planning is that favorable offshore jurisdictions have relatively short statutes of limitation on fraudulent transfers. Domestic asset protection is often vulnerable to a creditor’s allegations that the debtor has transferred assets, or has recently converted a nonexempt asset to an exempt asset, in an effort to defraud or delay creditors’ collection. Most states have four-year statutes of limitations, which means that a creditor’s attorney can attack any asset transfers up to four years after the transfers took place. Favored offshore jurisdictions have two-year statutes of limitation on fraudulent transfers. The shorter statute of limitations makes it easier for debtors to defend creditor challenges of their asset protection planning. The favorite legal tool involved in offshore planning is the offshore asset protection trust which otherwise resembles a typical U.S. trust. The offshore trust is a “self-settled trust” where the settlor and the beneficiary are one and the same. In an offshore asset protection trust, the trustee is nominated by the settlor and the trustee is either an individual who is not a U.S. citizen or a trust company with no U.S. offices or affiliation. Most often, an offshore asset protection trust will have additional people serving as trust advisors or trust protectors. These are individuals not under the settlor’s control who have powers in the administration and protection of the trust and its assets but who have no beneficial interest in trust property. As a practical matter, the most important decision in forming an offshore trust is the selection of a trustee. The offshore trustee can be a bank or a lawyer in another country. The trust plan works best where the trustee is professional, reliable, and most importantly, willing to defend the offshore trust against attacks initiated by creditor attorneys. Offshore asset protection trust plans have been successfully attacked by recent court decisions. If the settlor retains control over the appointment of the offshore trustee, or if the trust protectors or trust advisors have the power to remove and replace the offshore trustee, a court may force either of these parties to dissolve the trust. If they refuse to obey the court, the judge can hold the settlor, trust advisor, or trust protector in contempt of court and can incarcerate them until they comply with the court's order. An offshore trust will be most effective if the debtor/settlor is willing to relinquish all control over the offshore trust and the offshore trustee, and if all parties to the trust other than the settlor are outside the jurisdiction of the United States. Offshore asset protection trusts are not designed to reduce or avoid U.S. income tax. ______________________________________________________________________________________________ ANNUITIES Annuity arbitrage is a financing tool which enables older debtors in good health to fully fund life insurance for their descendants and generate cash flow protected from creditors during their lifetime. The life insurance, the annuity, and even the annuity proceeds paid to the debtor are protected from creditors under Florida law. Immediate annuities involve a lump sum investment in an annuity contract in exchange for a guaranteed income stream. The amount of the income stream is based on prevailing interest rates, and most importantly, on the age and health of the annuitant. Annuitants with a shorter life expectancy because of age and health typically are offered larger periodic payments. Life insurance premiums are also based on the same insured’s life expectancy. Importantly, different companies selling either immediate annuities or life insurance contracts sometimes use different mortality tables and make significantly different judgments on a person’s life expectancy. When the annuity issuer assumes a shorter life expectancy for the applicant than does the life insurance issuer the applicant has a financial opportunity. Sometimes an experienced and astute financial professional can match individuals with particular annuity companies and particular life insurance companies to create a meaningful divergence in life expectancy assumptions. When the annuity company is convinced of a relatively shorter life expectancy, and the applicant’s health, although not necessarily perfect, is good enough to warrant life insurance based on a relatively longer life expectancy, the annuity income stream will often exceed life insurance premiums. In such event, the immediate annuity will provide payments in excess of life insurance premiums, and the immediate annuity both funds the life insurance and provides the individual a cash flow sheltered from creditors. The life insurance policy is typically owned by a life insurance trust to keep the insurance outside the insured’s taxable estate and to protect the death benefit from the beneficiaries’ creditors and former spouses. The profit potential from this investment is important in defending creditor attacks of fraudulent conveyance. If the creditor argues that a debtor purchased the annuity and insurance to shelter money from creditors, the debtor responds that the investment was made to take advantage of an unusual arbitrage opportunity to fund life insurance for estate planning purposes and generate cash flow for lifetime support. Only certain, relatively sophisticated financial professionals can arrange a profitable annuity arbitrage. Individuals should only deal with financial advisors with demonstrated experience in successful annuity arbitrage as improperly structured arbitrage arrangements may have adverse income tax consequences. Additional protection is available by purchasing international annuities. Particularly, Switzerland and Liechtenstein have laws which guard annuities from attack by creditors for outside countries including the United States. Swiss law, or instance, provides that swiss annuities are not part of a debtor/owner's bankruptcy estate even if a foreign (U.S.) court expressly directs liquidation of the annuity policy. Swiss and Liechtenstein fraudulent conveyance statutes provide that a fraudulent conveyance claim against their annuities must be brought in their country's courts. Moreover, purchasing an annuity in the U.S. as well as offshore may more easily be defended against fraudulent transfer allegations as being a prudent financial planning tool. ______________________________________________________________________________________________________________ ANNUITIES Annuity arbitrage is a financing tool which enables older debtors in good health to fully fund life insurance for their descendants and generate cash flow protected from creditors during their lifetime. The life insurance, the annuity, and even the annuity proceeds paid to the debtor are protected from creditors under Florida law. Immediate annuities involve a lump sum investment in an annuity contract in exchange for a guaranteed income stream. The amount of the income stream is based on prevailing interest rates, and most importantly, on the age and health of the annuitant. Annuitants with a shorter life expectancy because of age and health typically are offered larger periodic payments. Life insurance premiums are also based on the same insured’s life expectancy. Importantly, different companies selling either immediate annuities or life insurance contracts sometimes use different mortality tables and make significantly different judgments on a person’s life expectancy. When the annuity issuer assumes a shorter life expectancy for the applicant than does the life insurance issuer the applicant has a financial opportunity. Sometimes an experienced and astute financial professional can match individuals with particular annuity companies and particular life insurance companies to create a meaningful divergence in life expectancy assumptions. When the annuity company is convinced of a relatively shorter life expectancy, and the applicant’s health, although not necessarily perfect, is good enough to warrant life insurance based on a relatively longer life expectancy, the annuity income stream will often exceed life insurance premiums. In such event, the immediate annuity will provide payments in excess of life insurance premiums, and the immediate annuity both funds the life insurance and provides the individual a cash flow sheltered from creditors. The life insurance policy is typically owned by a life insurance trust to keep the insurance outside the insured’s taxable estate and to protect the death benefit from the beneficiaries’ creditors and former spouses. The profit potential from this investment is important in defending creditor attacks of fraudulent conveyance. If the creditor argues that a debtor purchased the annuity and insurance to shelter money from creditors, the debtor responds that the investment was made to take advantage of an unusual arbitrage opportunity to fund life insurance for estate planning purposes and generate cash flow for lifetime support. Only certain, relatively sophisticated financial professionals can arrange a profitable annuity arbitrage. Individuals should only deal with financial advisors with demonstrated experience in successful annuity arbitrage as improperly structured arbitrage arrangements may have adverse income tax consequences. Additional protection is available by purchasing international annuities. Particularly, Switzerland and Liechtenstein have laws which guard annuities from attack by creditors for outside countries including the United States. Swiss law, or instance, provides that swiss annuities are not part of a debtor/owner's bankruptcy estate even if a foreign (U.S.) court expressly directs liquidation of the annuity policy. Swiss and Liechtenstein fraudulent conveyance statutes provide that a fraudulent conveyance claim against their annuities must be brought in their country's courts. Moreover, purchasing an annuity in the U.S. as well as offshore may more easily be defended against fraudulent transfer allegations as being a prudent financial planning tool. _________________________________________________________________________________________________ NEW ASSET PROTECTION TOOLS - Delaware Series LLC Many corporations own and operate more than one business, and likewise, many individual real estate investors own multiple properties legally titled under a single name or business entity. A problem with "single-pot" ownership of multiple businesses or property is that any legal liability relating to one business or property jeopardizes all other assets. Therefore, most owners of related businesses and real estate investors with several properties seek to separate ownership so that lawsuits against one business or one property will not jeopardize the owner's other investments. Traditionally, liability segregation meant setting up new and different business entities to own each business or each property. As businesses grow, multiple entity ownership can become complicated and expensive. The Delaware legislature created a new type of legal entity which aims to solve this planning problem by permitting a single limited liability company to own multiple subsidiary limited liability companies each of which wons a single-asset business. This new entity is called "The Delaware Series LLC." Although a Series LLC must be created in Delaware, it can register to do business or own property in any other state. This innovative concept allows one LLC to establish separate series, or units, under the same LLC umbrella. Each unit of a Series LLC can own distinct assets, incur separate liabilities, and have different managers and members. A Series LLC pays one filing fee and files one income tax return each year. Under Delaware statutes, liability incurred by one unit does not cross over and jeopardize assets titled in other subsidiary units of the same Series LLC. Although the same liability isolation can be achieved in any state with multiple entities, the Delaware Series LLC, in theory, offers superior and more economical asset protection under a single roof. There are several practical applications for a Delaware Series LLC. One such use is ownership of multiple parcels of real property in separate series within a Delaware Series LLC. This is less expensive then creating, filing, and maintaining several different LLCs to segregate property ownership. Second, an operating business could benefit from a Delaware Series LLC if the business owns real estate used in its operations. If the business were formed or merged into a Delaware Series LLC, one series could own the real estate and a different series could operate the business. Liability incurred by the business operations, in theory, would not jeopardize the real estate. In addition, there should be no sales tax due on rent paid by the operating series to the real estate series. Another possible benefit of a Delaware Series LLC is the ability to transfer assets among related businesses without income tax on built-in gain or liability for real estate transfer taxes. Given the protection possibilities and planning flexibility provided by Delaware's Series LLC statutes, one might expect to see Florida's business landscape covered with innumerable Delaware Series LLCs registered to do business in Florida. Yet, Delaware Series LLCs remain relatively uncommon in Florida and other states. There are two principle reasons for this incongruity. The first reason is uncertainty about how a Delaware Series LLC will be taxed for federal income tax purposes. A recent article by the prestigious and widely-followed BNA Tax Management Service, Tax Management Memorandum, Vol 45, No. 4, February 23, 2004, concluded that the lack of clear federal tax standards for a Series LLC with multiple members restricts adoption of this potentially useful business entity. The second reason is that the asset protection and planning advantages of the Series LLC are only theoretical, and unproven, in actual asset protection combat. No Florida state court and no Florida bankruptcy court has yet examined the asset protection effectiveness of a Delaware Series LLC. Therefore, business people, investors, and advisors should proceed cautiously before relying on this new device to protect their wealth from creditors pending further court interpretation. ____________________________________________________________NEW ASSET PROTECTION TOOLS - Domestic Asset Protection Trust A so-called "self-settled" trust is a trust where the person who creates the trust and transfers the assets to the trust is also a turst beneficiary. A living trust is a common example of a self-settled trust used for estate planning. Under Florida law established by a long and consistent line of court decisions, a self-settled trust does not protect the trustmaker's beneficial interest in the income or principal of the trust from the trustmaker's creditors. Offshore trusts provide asset protection benefits mainly because statutes in select foreign countries state that a trustmaker's beneficial interest in a self-settled trust formed in their country is protected from the trustmaker's own creditors. These offshore trust statutes include other debtor-friendly provisions to encourage new trust business. Some states in the United States have recently enacted statutes which expressly grant these same type of asset protection benefits to self-settled trusts at one time found only offshore. Trusts created under these state statutes are referred to as domestic asset protection trusts ("DAPT"). These DAPTs were encouraged by state legislatures in an attempt to provide investors and business owners the protection of offshore trust planning within the United States in large part to attract businesses and assets to their states. Most state DAPT statutes have several common features. The statutes provide that the DAPT is irrevocable so that assets transferred to the trust may not be withdrawn by the trustmaker. The statutes also require at least one trustee to be either a state resident or a corporation doing business in the state. Some trust assets must be located or deposited in the state. The DAPT statutes, like their foreign counterparts, typically provide for a position of "trust protector" who is a person with power to veto the trustee's decisions to make distributions if such distributions may be vulnerable to the trustmaker's creditors. Alaska, Delaware, and Nevada are states with favorable domestic asset protection trust laws. Of these three states, many attorneys consider Nevada to be the best DAPT jurisdiction. For example, Nevada law provides creditors the ability to challenge asset transfers to a trust as a fraudulent conveyance two years after the transfer is made or six months after the transfer is discovered. In Alaska and Delaware, by contrast, a creditor has four years to challenge a fraudulent conveyance to their states' DAPTs. Nevada law also has relatively flexible trustee provisions under which a settlor can appoint himself as trustee over trust investments as long as an independent trustee has discretion to make trust distributions. A DAPT works well in theory. Many qualified commentators have published persuasive legal arguments supporting the DAPT's asset protection. However, to date, no DAPT has been tested in a Florida court. While there may be a good legal theory why a Florida court should uphold the asset protection features of any trust created under the laws of another state, doing so would contradict a well-established public policy in Florida denying asset protection to any self-settled trust.