Florida Asset Protection Blog

Welfare Benefit Plans: Watch Out !

Some insurance agents and financial planners are marketing something called a "welfare benefit plan" or a "419 Plan" (named after Section 419 of the Code). these plans are typically marketed to business owners to provide income tax savings and employee benefits through the use of insurance. Many of these plans sold are abusive shemes to evade income tax, although some may qualify for tax benefits. The plans always involve the sale of insurance and insurance commissions. If you are promised huge up-front tax deductions by participating in one of these 419 Plans be very careful and make sure you seek independent legal advise.

For purposes of this Blog, a 419 Plan is not covered by the Florida statute that protects from creditors IRAs and certain tax qualified retirement plans. Generally, a 419 Plan, a/k/s Welfare Benefit Plan does not provide effective asset protection under Florida law.

Life Insurance Confusion

Some people are confused about the protection from creditors afforded to life insurance owned by Florida residents. Florida statutes state that cash value of life insurance, in whatever form, owned by the insured is exempt from the owner's creditors. The insurance policy in question must be owned by the same person insured by the policy. For instance, if a husband owns a life insurance policy on the life of his spouse, and the policy has accumulated significant cash value, that cash value is not exempt from the husband's (owner's) creditors. However, if the husband's policy insured his own life the cash value would be protected from creditors under the subject Florida statue.

If the husband owned the policy on his own life, upon the husband's death the death benefit would be protected from the creditors of the husband's estate, but the death benefits paid to individual beneficiaries (spouse, children etc) would not be protected from any creditors of the beneficiaries that existed at the time of the insured's death. Only if the policy were owned, or payable to, an irrevocable life insurance trust with spendtrift language would creditor protection continue after the death of the insured.

Underestimating Government Creditors- again!

People seeking asset protection continuously underestimate the intelligence and powers of their creditors, especially government creditors.. A case in point is a client who consulted with me in March about potential lawsuits by private individuals and one or more government agencies seeking civil remedies. My advise was that the particular creditors, and particularly the government agencies, would within a week or two attempt to freeze all their bank accounts, deposits with attorneys, credit cards and any other means of financial support and legal defense. I suggested making sure enough cash was set aside in a safe place to pay his litigation attorneys and to pay living expenses. Thereafter, the client consulted a tall-building law firm which advised the client that if certain steps were taken the creditors would have no right to freeze assets prior to a lawsuit and judgement. Guess what happened.

Four weeks later all of the client’s assets were frozen by the government agency seeking civil- not criminal- damages. The client was not accused of any criminal act, only a civil violation, yet all his means of support and legal defense were taken away without notice pursuant to a temporary injunction. The lesson to be learned- it seems a hard lesson to teach- is that whenever there is the slightest hint that an agency of any government is considering bringing a civil action the people involved should take immediate steps to provide financially for their subsequent legal defense and for their living expenses for an extended period. Government creditors are not slow, incompetent, or companionate, and they have unlimited legal resources. Do not underestimate your foes.

Bankruptcy Decision: Tenants by Entireties

I received an email for an attorney about a bankruptcy court decision in Michigan which held that filing bankruptcy destroyed a tenancy by entireties. The decision was described as an indication of the end of tenants by entireties protection. Actually, such description is indicative more of the end of common sense than the end of tenancy by entireties protection, at least as far as Florida is concerned. Florida has a long and strong tradition of common law tenancy by entireties protection most recently championed by the Florida Supreme Court in the 2001 Beal Bank decision discussed elsewhere in previous post. Secondly, regardless of what happens in Michigan bankruptcy courts, the great majority of Florida debtors never come near any bankruptcy court in the protection of their assets. No Michigan bankruptcy decision should be interpreted as a retreat by Florida’s state court judges, including the Florida Supreme Court , from the concept of tenants by entireties ownership protecting against creditors of each individual spouse.

Wage Protection Statute

Florida Statute 222.11 exempts for creditors salary and other compensation for personal services paid to the head of household of a Florida family. Many closely held businesses and self employed persons confuse the asset protection of this statute. The confusion centers over the difference between money received from the business as salary and money received as distribution of profits. Only compensation for personal services to the business is protected by Florida Statute 222.11. Only compensation paid to the business owner in his role as employee are protected. Therefore, it is important for the small business owner to document his status as employee for purposes of the wage exemption statute. Documentation includes factors such as: (1) payment of fixed amount of salary on a regular basis. Payments to the owner in varying amounts as needed to pay the owner’s personal family expenses is in the nature of profit distribution rather than employee compensation (2) existence of a written employment contract between the corporation and the owner (employee), and (3) payments conditioned upon the time the owner actually works at the business rather than amounts based upon the business revenue or profit.

Also, remember that there can only be one head of household in any family. In a two income marriage, the spouse who earns the most money will usually be considered the head of household and the person whose wages and other compensation qualify for protection under the wage exemption statute. The lower-earning spouse, regardless of how much money earned, will have their wages exposed to wage garnishment by their individual creditors

Instant Florida Residency?

Someone presently domiciled outside of Florida asked whether they could do something in Florida which would allow them to be a Florida resident and still work and live in their present domicile. The answer is clearly "no way." There is no instant Florida residency, and Florida residency is not portable. Florida residency requires demonstrated intent to make Florida your permanent and primary place of residency. True, many Floridians work in other states, are at school in other States, or they live in other States part of or most of the year. But, these people either own Florida real estate, have previously lived here full time, or have other facts which give them Florida roots. One cannot come into Florida, fill out drivers license and voters registration form and a declaration of Florida domicile, and then turn around on the next plane back home with Florida residency in their pocket. Courts have often said that Florida's asset protection laws are not available to tourists.

Prohibited Transaction Forfeits IRA Protection

Florida Statute 222.21 protects from creditors financial assets that qualify under specified sections of the Internal Revenue Code to include most IRAs, 401k plans, and other common tax “qualified” retirement plans. The Internal Revenue Code states that a IRA will cease to be tax qualified for tax purposes the first day of the tax year in which the taxpayer and the IRA are involved in what is called a “prohibited transaction.” Examples of prohibited transactions include sales, exchanges, and similar financial transactions between the IRA and its owner or other “disqualified persons” such as members of the owner’s family. For asset protection, it is important to keep in mind that any prohibited transaction or self-dealing which would cause an IRA to lose its tax qualification not only would have adverse income tax consequences, but it would also cause the IRA to forfeit its creditor protection. The loss of creditor protection would be retroactive to the beginning of the tax year which causes the problem to be even more troublesome for asset protection planning.

Is Homestead in Living Trust Protected?

There has been much debate among estate planning attorneys about the pros and cons of deeding your homestead to a living trust. One benefit often mentioned is avoidance of probate upon death. But, because homestead is exempt from creditors, the homestead passes quickly through any probate proceeding. Also, homestead jointly owned between spouses automatically passes to the surviving spouse

The biggest issue in asset protection is that the Florida Constitution only protects homestead properties owned by “natural persons.” The legal question is when a homestead is owned by the trustee of a living trust is the homestead still owned by a natural person and therefore eligible for creditor protection. The courts are split. There is one Florida decision which denied creditor protection to a homestead owned by the grantor’s living trust even though the settlor resided in the property; a subsequent decision from a different court upheld homestead asset protection for a living trust. Until this legal issues is resolved, there is an asset protection risk in transferring your primary residence to a living trust. People vulnerable to lawsuits should beware.

Liability For Your Child's Car Accidents

Most parents accompany their children to get the child's first drivers license at age 16. Did you know that this trip to the licensing agency with your minor child could expose you to serious liability. Under Florida Statute 322.09 the application of a child for a driver's license must be signed and verified by a aprent or any other adult who is willing to assume obligations imposed by Statute 322.09 (2). The reference subsection (2) states that any negligence or willful misconduct of a minor under the age of 18 when driving shall be imputed "to the person who has signed the application of such minor for a permit or license, which person shall be jointly and severally liable with such minor for any damages caused by such negligence or misconduct.

Therefore, by signing the driver's permit application of your child you are assuming legal responsibility for the child's accidents and reckless driving.

Don't believe me; read the Statute 322.09 (1) and (2).

What's the solution. If possible, convince someone else to drive your child down to the license office to get his first license. If you have someone on your payroll- an employee or housekeeper- give them the job; let them witness your child's first "solo drive" They probably have less to lose than you do.

Better yet, get good car insurance.

Piercing the Corporate Veil: Is it Something to Worry About?

Many clients who have established a business as a corporation, or even better, as a limited liability company are worried that their creditors who obtain a judgment will be able to pierce the corporation and attack their personal assets. This creditor tactic is referred to as piercing the corporate veil.

In fact, under Florida law it is very difficult to pierce a corporation so long as the corporation operated as a distinct and separate entity. In Dania Jai-Alai Palace, Inc. v. Sykes, 450 So. 2d 1114 (Fla. 1984), the Florida Supreme Court established the standard to be applied in a piercing the corporate veil claim. The Court held that in order to pierce the corporate veil, a plaintiff is required to prove both that the corporation is a mere instrumentality or alter ego of the defendant and that the defendant engaged in "improper conduct." Id. at 1120-21. The Court reasoned that the corporate veil should not be pierced unless it is shown that the corporation was organized or employed to mislead creditors or to work a fraud on them.

Just because the business owner does not update corporate records and minutes each year in a timely manner is not sufficient to pierce the corporation. In reality, the most prevalent reason for a corporation (or an LLC) not protecting people’s personal assets is that they operate the corporation as their “alter-ego” which means, most simply, that they pay personal expenses out of the corporation and withdraw money from the corporation as needed. The property practice is for your corporation to pay the owner and other employees a periodic salary and dividends (or in the case of an LLC, member distributions). Also, maintain a separate corporate bank account and do not commingle personal money unless clearly documented as loans. In short, respect the separate existence of your business and do not treat the business checking account as your personal savings account or piggy bank. If you follow these simple guideline, a creditor is unlikely to defeat corporate asset protection under Florida law

Married Couple Living in Two States

Interesting legal problem today involving a husband who was moving to Florida to find new work and a new house. His wife wanted to remain in another state with their child until the child finished high school. The couple had retained separate lawyers in contemplation of a divorce. Both husband and wife had significant creditor problems on the horizon. The state where they lived currently had almost no creditor exemptions. The problem was how to let husband maximize use of Florida's liberal asset protection exemptions, especially our homestead exemption, and still get wife enough money to support herself. Here is part of my proposed plan...

I suggested that husband and wife liquidate separate and jointly owned non-exempt assets and apply proceeds to husband's purchase of his homestead in Florida. Wife would be left with no assets subject to levy in her home state. When husband gets a new job I suggested he open up a wage account at his Florida bank. Since husband will continue his support of wife and child he should be head of household even though his dependants do not live in Florida home. Husband does not want to send checks to wife and child for support because if there is judgment against wife in her home state the money would be garnished when wife deposits in her checking account. Instead, husband can give wife a debit card on his wage account in Florida. Wife can use money for living and support, but money would remain protected salary in husband's wage account for a period of six months after salary received. Property settlement in divorce proceeding can be delayed until they are able to work out favorable settlement with creditors. Alternatively, property settlement could entail giving wife equitable interest in husband's assets exempt from creditors.

Bankruptcy Judge Attacks Entireties Ownership of Automobiles

In the case of In re Shilo, Case No. 03-9358, Judge Jenneman issued an Memorandum Opinion which held that a car owned by married couple as husband or wife with rights of survivorship is not legally owned tenants by entireties and is not exempt from the husband's individual creditors. The general rule in Florida is that both real and personal property owned tenants by entireties is exempt from the creditors of either spouse individually, although it is not exempt from any joint creditors

The Court recognized that the Florida Supreme Court decision in the Beal Bank case created a presumption that all personal property owned by husband and wife is owned tenants by entireties. The Judge found that Florida Statute 319.22 essentially pre-empts the Beal Bank decision as to jointly owned motor vehicles. The Statute says that a motor vehicle can be owned by husband "and" wife or by husband "or" wife- the choice is up to the married couple. Under the statute, when a car is owned husband "or" wife, either spouse may alientate title to the car. The Court held that because either spouse can transfer title to a car titled husband "or" wife, the creditors of either spouse can likewise access the individual's spouse's interest in the motor vehicle