ASSET PROTECTIONAsset 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 ProtectionUnder 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 EntiretiesCommon 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 ProtectionThe 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.
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FLORIDA ASSET PROTECTION - Homestead ProtectionIn 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 PROTECTION10 Biggest Mistakes in Asset Protection Planning
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ASSET PROTECTION - Fraudulent ConveyancesFraudulent ConveyancesWhat 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 ProtectionMany 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 OwnershipMost 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:
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 / LLCThere 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. ______________________________
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