Florida Asset Protection Blog

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 even the trust protectors or trust advisors, who 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 incarcerated them until they comply with the court’s order. An offshore trust will be most effective only if the debtor/settlor is willing to relinquish all control over the offshore trust and the offshore trustee, or if all parties to the trust other than the settlor are outside the jurisdiction of U.S. courts.

Offshore asset protection trusts are not designed to hide assets from creditors nor to reduce income tax liability.

Asset Protection Through LLC

Florida limited liability companies (LLC) are a popular tool in business planning. Many lawyers use the LLC as an alternative to the Subchapter S corporation as the preferred legal entity for new businesses. Asset protection attorneys also use the LLC as a legal tool for domestic asset protection planning. Membership interests in a limited liability company are not exempt from execution or attachment by judgment creditors, but Florida law gives creditors limited remedies against a debtor’s LLC interest. A judgment creditor cannot attach an LLC member’s interest. A judgment creditor cannot seize assets owned by the LLC to satisfy a judgment against any one of the LLC’s owners. In a properly drafted LLC agreement, the creditor has no rights to inspect the books and records of the LLC.

Under Florida Statutes, a creditor’s remedy is limited to what is known as a “charging lien” against the LLC’s cash distributions. In the event the LLC manager chooses to make no distributions, the member’s creditor gets nothing. There is an IRS revenue ruling that held that in the event an LLC has taxable income allocated to a debtor/member, but where the LLC makes no distributions which are attachable by a charging lien, the member’s creditor is responsible for his income tax liability to a member even though the creditor receives no distributions by virtue of his charging lien. A debtor’s limited rights under a charging lien, together with this income tax liability, makes creditors reluctant to attack a member’s interest in a limited liability company, and makes the LLC an effective asset protection planning tool.

A limited liability company agreement with effective asset protection features is a complicated legal document which should be drafted by a lawyer experienced in asset protection law.

Need For Florida Asset Protection

Asset protection is a process of insulating your estate assets against attack by creditors and plaintiff’s attorneys. In the United States there are more than one million lawyers, each with a license to file lawsuits against deep-pocket defendants by paying court filing fees of $150 or less. Too often, decisions by judges or juries are based more on emotion than on facts or the law, and frequently the result is a catastrophic damage award that wipes out a lifetime of hard work and investment. A well-designed asset protection plan builds a protective fort around the client's estate and guards family wealth from external creditor attack and frivolous lawsuits. The most effective asset protection fortress contains multiple layers of protection, so that even if they can defeat one device, there are other defenses around the family’s nest egg. Asset protection is, therefore, an essential fundamental building block of financial planning.

Does Asset Protection Work

Many people question whether even the most complicated and sophisticated asset protection plan actually defeats creditor’s claims, especially where the asset protection plan is designed and implemented close to a judgment being entered or a lawsuit being filed. Evaluating the effectiveness of asset protection depends on having realistic goals and objectives. If by asset protection a person means becoming 100 percent judgment proof, then successful asset protection is difficult, especially if not done several years before problems arise. If, however, one’s goal is to substantially improve their creditor protection and to place the majority of their assets beyond creditor attack, then asset protection success is obtainable if done early and with the help of an experienced asset protection lawyer.

Without any asset protection planning, a client subject to a potential liability or an actual judgment will lose all assets not exempt by the law. With professional and advanced asset protection, collection of a judgment can be made difficult (though never impossible) and the debtor gains substantial leverage in negotiating a reasonable settlement of a creditor’s claim. Therefore, a reasonable goal of domestic or offshore asset protection is to put yourself in a substantially improved bargaining position with future creditors.

Most important, asset protection does not involve either hiding assets or income tax protection. Effective asset protection does not involve secreting assets, and no one should expect that asset protection will reduce U.S. income tax liability.

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 Florida resident and must reside on the homestead property.

What makes Florida’s homestead protection such a powerful asset protection feature are it’s its unlimited monetary protection. 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. Under a Florida Supreme Court ruling, a person can transfer unprotected, non-exempt assets to his homestead at any time by either buying a new home or reducing the principal balance of an existing mortgage and protect this money under the homestead umbrella, even if the asset transfer was clearly designed to hide money from creditor claims

Pay on Death Accounts

Received an interesting question from a litigation attorney today about fraudulent conveyances. His client had a parent in the hospital with a short life expectancy. Received an interesting question from a litigation attorney today about fraudulent conveyances. His client had a parent in the hospital with a short life expectancy. The parent owns a 50% interest in a homestead property in Florida, and he has a $100,000 in a bank account designated pay on death to child. Question posed was whether parent should withdraw cash, give money to the child, in order to avoid the hospital and doctors going after the money to pay medical bills.

I advised attorney to have client maintain money in pay on death account. Giving the money to the child while the parent is still alive could be attacked by the parent’s creditors, such as his medical providers and hospital, as a fraudulent conveyance. This would result in the surviving child being named a defendant in a lawsuit and put in a position of defending her deceased parent. Assuming the pay on death account was established some time before the present illness, the creation of the child’s contingent interest, her inheritance of the account upon her parent’s future death, could more easily be defended as legitimate estate planning designed to avoid probate in the advance of any illness and contingent monetary liability to pay for medical care. .

Good Resource Link

A very good source of articles on asset protection planning is available on the website of attorney, Alan Gassman who practices in Clearwater, Florida. . Updates & Articles, Gassman & Associates, Clearwater, FL USA. Alan has posted many accurate articles on his site about many aspects of asset protection. Particulaly helpful are his postings related to medical practice, medical regulation, and physician asset protection.

Tenants by Entireties

In March, 2001, the Florida Supreme Court decided the case of Beal Bank v. Almand where the Court adopted the presumption of tenants by entireties ownership for bank accounts owned jointly by husband and wife. Since then most attorneys assumed that all personal property owned jointly by spouses was presumed tenants by entireties property. This is important because tenants by entireties property is exempt from levy by creditors of either the husband or the wife individually. However there is one bankruptcyopinion which has taken a different view, and which has limited the Beal Bank decision to apply only to bank accounts.

I am referring to the bankruptcy case in the Jacksonville Division In Re McAnany where the court held that Beal Bank created a T by E presumption only as to bank accounts. However, the Supreme Court in Beal Bank specifically stated that, "we conclude that stronger policy considerations favor allowing the presumption in favor of a tenancy by the entireties when a married couple joinly owns personal property." The Supreme Court discussed in detail the titling of bank accounts in particular only because that was the only personal property at issue in this case. But the better view is that the Supreme Court wherever possible thoughout the opinion made its ruling as to personal property in general, and nowhere in the opinion did the Court specifically restrict is ruling to just one item of personal property, ie, bank accounts. Asset protection planning should continue to assume that any personal as well as real property owned jointly by spouses is presumed to be protected tenants by entireties property.

Liability for Fraudulent Transfer

On January 29, 2004, the Florida Supreme Court issued an opinion in the case of Freeman v. First Union Ntl Bank which is important to attorneys and others involved in Florida asset protection planning. Some creditors and their attorneys have attempted to thwart asset protection planning by attacking debtor’s attorneys and their financial institutions for their part in assisting fraudulent conveyances. The Supreme Court held that the Uniform Fraudulent Conveyance Statute (UFTA) as enacted in Florida does not provide a basis for claims against third parties of aiding and abetting a fraudulent conveyance. .

These attacks have been consistently rejected by Florida’s applellate courts. BankFirst v. UBS Paine Webber, Inc, 842 So. 2d 155 (Fla 5th DCA 2003), issued February 10, 2003.The Supreme Court also rejected arguments that the UFTA could be used to impose liability on anyone other than the recipient of a fraudulent conveyance. The Court held that the UFTA is a statutory device to undo a fraudulent conveyance, but it is not intended to service as a vehicle by which a creditor can sue anyone other than the transferee of the conveyance for the return of the property or its value.