Florida Asset Protection Blog

Choice of Business Entity For Attorneys and Doctors

A professional cannot use a corporate shield to protect himself from malpractice. A professional is anyone who under Florida law is required to obtain a license in order to practice their trade. Florida statutes provide for distinct entities engaged in a professional business. These entities are a Professional Corporation or Association (commonly known as a P.A.) and a Professional Limited Liability Company. (abbreviated P. L. C. or L. C.) . A professional corporation or limited liability company by statute may only be owned by one or more licensed professionals. The rules for doctors and lawyers are different. Lawyers’ P.A.s or their P.L.C.s may only be owned by one or more attorneys according to the cannons of legal ethics. Physicians are not so restricted. A physician can create a standard, non-professional entity to house their medical practice. This is a distinct advantage for physicians because the professional entity statutes include many restrictions or transfer. Physicians can also use this flexibility to better protect their ownership interest in their medical practice by , for example, owning their practice with their spouses jointly as tenants by the entireties. Florida statutes specifically authorizes ownership of a medical practice by the spouse, parent, or child of a licensed health care practitioner. I do not see any reason why a physician would choose to own his practice through a professional association or a professional limited liability company.

Payment of Homestead Mortgage Upset in Bankruptcy

It is becoming well known that following the Florida Supreme Court case of Havoco v. Hill a debtor can use non-exempt cash otherwise subject to creditors to either purchase a homestead or reduce the principal balance of a mortgage on the debtor’s homestead without fear that the purchase or principal payment could later be reversed or undone pursuant to Florida’s fraudulent conveyance laws. Under the Florida Court’s decision it makes no difference when money is applied to the homestead to protect the money from creditors.

But, does it make any difference if that same debtor files for bankruptcy liquidation under Chapter 7 within one year of the purchase or mortgage payment. Section 727 of the Bankruptcy Code says that a fraudulent conveyance by a debtor within one year of bankruptcy is grounds to deny discharge, i.e., “kick the debtor out of bankruptcy.” How do the penalties of the Bankruptcy Code interact with the homestead protections established under Florida state law. The Florida Supreme Court in Havoco v. Hill did not say that hiding non-exempt money in a homestead is not a fraudulent conveyance or fraudulent conversion; it said that the State’s constitutional homestead protections take precedence over remedies available under Florida’s fraudulent conveyance statutes.

The initial answer is that Havoco v. Hill will not protect a bankruptcy debtor’s fraudulent conveyances to homestead. In the bankruptcy case of In re Chauncey, 308 B.R. 97 (S.D. Fla. 2004) the bankruptcy court denied a bankruptcy discharge to a debtor who paid substantial funds to his mortgage company three months of filing bankruptcy. Furthermore, the court sanctioned the debtor by placing an equitable lien on his homestead and permitting the trustee, or the creditors, to foreclose on the lien. In this case, the debtor who tried to use homestead protections to abuse the bankruptcy system lost the benefits of bankruptcy and possibly lost his house as well.

I checked with the debtor's attorney and found that he appealed this decision to the Federal District Court of the Southern District of Florida. The ultimate ruling in this case is still to come.

Limited Liability Partnerships

I’ve said this many times and to many people, but it needs to be repeated. In 1999, the Florida legislature pased CS/HB 361 amending Florida Statutes 620.8101 to provide, among other things, for limited liability partnerships (LLP) and limited liability limited partnerships (LLLP). The LLP is a general partnership where none of the partners has individual liability for the acts of the partnership. An LLLP is a limited partnership where the general partner is no longer personally liable for the acts of the limited partnership. The latter is particularly important for asset protection planning. Formerly, in the “old days”, attorneys formed limited partnerships with a corporate general partner so that no individual would expose themselves to personal liability as general partner. The general partner of an LLLP is protected by the above statute from liability for the acts of the limited partnership. Therefore, an individual general partner of a limited liability limited partnership exposes himself to no individual liability.

The advantage of using an LLLP with an individual general partner is that the partnership saves the cost and complexity of establishing and maintaining a separate legal entity (the corporate general partner) in order to avoid personal liability.

Any existing limited partnership may become a limited liability limited partnership and remove the burden of liability from the general partner. Those limited partnerships with corporate general partners can amend their agreements, dissolve the corporate general partner, and replace it with an individual limited partner. To become a limited liability limited partnership (or a limited liability general partnership) the partnership needs only to file a “Statement of Qualification” with the State of Florida and pay a $25.00 filing fee. Filing of the Statement of Qualification does not disturb any other aspect of the underlying entity or existing partnership agreement. There is no reason why any partnership concerned about liability of its general partners should not file a Statement of Qualification to become a limited liability partnership.

Can Aliens Protect Homestead or File Bankruptcy

I occasionally get asked whether non-U.S. citizens (“aliens”) resident in Florida can file for bankruptcy protection in Florida or can claim homestead protection. The rule is that debtors must demonstrate they are permanent residents of the U.S. and Florida to take advantage of bankruptcy protection and Florida asset protection benefits such as homestead. Florida bankruptcy courts have held that an alien debtor can file bankruptcy if he can demonstrate the intent and ability to be a permanent Florida resident. In order to even be able to argue intent of permanent residency a person must have a permanent visa of “green card.” A non-citizen who fails to maintain visa status cannot be a resident of Florida for purposes either of claiming homestead protection or filing bankruptcy because he lacks the legal right to be a permanent resident. Application for permanent visa is not enough until the application is approved and the green card is in hand.

Protection of Annuity Income

Most people seeking asset protection know that annuities owned by Florida residents are protected from creditors by Florida Statute 222.14. The protection is afforded to the annuity owner, the annuitant, and the income beneficiary of the annuity. I was recently asked to explain what happens to the annuity "asset protection" when an the annuity begins to pay out an income stream to the beneficiary and the beneficiary has creditors with judgments? Can a creditor seize annuity proceeds after they are paid out and in the hands of the beneficiary. Florida courts have held that annuity payments deposited in a beneficiary’s bank account retain protection from creditors so long as the funds can be traced to the annuity

Florida v. Texas: Which State Has Best Homestead Protection

The Spring 2004 edition of the American Bar Associations’s Real Property Journal included an interesting comparison of homestead laws of different states. It is well known that Florida and Texas have the most protective homestead provisions in their state constitutions. Both states protect unlimited value of homestead property, and the courts of both states have liberally construed these homestead protections in favor of debtors. Texas protects homesteads of unlimited value up to 200 acres in size, and Florida protects homesteads of unlimited value up to 160 acres in a county and ½ acre within a municipality. So, which state has the best protection?

Texas courts have refused to extend homestead protection to protect criminal conduct. The Florida Supreme Court, in a 1992 decision, said that the Florida Constitution does not exempt from homestead protection the proceeds of criminal activity. In addition, the Florida Supreme Court in 2001 case of Havoco v. Hill stated that homestead protections supersede fraudulent conveyance claims. The lack of any exception from criminal proceeds under Florida case law is one reason why people such as Dennis Kozlowski (Tyco), Scott Sullivan (Worldcom) and O.J. Simpson have moved to Florida and built very expensive homes. It is fair to say that why the Constitutional homestead provisions of Florida and Texas are similar, the Florida courts have made Florida’s homestead protections most attractive to those seeking shelter from liability.

Some Annuities May Not Be Protected

Florida Statute 222.14 protects annuities owned by Florida residents from creditor claims and judgments. Some people have asked whether variable annuities are included under the same statutory protection. Variable annuities are similar to investment accounts which at the option of the annuitant convert to a fixed annuity some time in the future. The issue was whether the variable annuities prior to their “maturity date” when they start paying out an income stream liked a fixed annuity were intended to be included in the statutes’s definition of protected annuities. In 2001, the Florida Supreme Court considered this issue in the case of In Re Alan L. Goldenberg. Dr. Goldenberg was a physician who filed for bankruptcy to escape malpractice judgments and claimed exemption of several variable annuities. The Court concluded that Dr. Goldenberg’s variable annuities were protected under Florida Statute 222.14. The Court stated that, “the proceeds of an annuity contract where there is a surrender penalty are exempt from legal process....”

A “surrender penalty” is a fee the investor must pay if the annuity is cashed in within a certain amount of time after purchase. Some annuities, such as “no-load” annuities do not impose surrender penalties. The Court’s decision seemed to indicate that annuities that do not have surrender penalties may not be exempt. If you own annuities that never had a surrender penalty, and you anticipate creditor claims, it may make sense to covert these annuities to different type of annuities or to other protected assets.