Florida Asset Protection Blog

Confusing Offshore Planning With Income Tax Avoidance

client who owns a large motor vehicle distributorship in Central Florida asked me about setting up an offshore company. I often establish offshore limited liability companies in Nevis West Indies for asset protection purposes. When I asked the purpose for this offshore entity, the client said his company has several hundred thousand dollars of receivables which he proposed to sell to the offshore entity at a discount. When the receivables were paid the offshore company would make the profit; the client assumed that profits earned offshore were not taxable to his U.S. dealership or to him personally.

This is another example of a businessman who confuses offshore planning for asset protection with tax planning. Offshore companies when properly used do not shield taxpayers from income taxation on money earned by a company operating in the United States. What this taxpayer had in mind was not tax planning but criminal tax evasion. I reminded the client that he owned and operated a visible and very profitable business which would always be on IRS radar. I encouraged him not to risk his business success to save a few tax dollars. Fortunately, he appeared to appreciate the advise and guidance.

There are no secrets in proper offshore asset protection. All asset protection should be clearly visible. Most importantly, no one should used asset protection techniques, and specifically offshore planning, to save income taxes.

Future After Bankruptcy

One important feature of filing bankruptcy is that any money or property acquired after the date the bankruptcy petition is not part of the bankruptcy estate. As soon as a bankruptcy petition is filed the debtor can begin a new business, buy new assets, deposit funds in his bank account, and receive gifts and awards. An example I and other attorneys use to illustrate this point is the hypothetical situation of a person who files Chapter 7 bankruptcy during the week and then wins the lottery the following weekend. This lucky debtor would be both bankruptcy and a millionaire because his lottery winnings occured after the filing date. Of course, most people dismiss this example as an exaggeration.

But, is this example impossible. No !. Consider the following newspaper report of a Chapter 7 bankruptcy debtor from New York who this month hit the lottery soon after filing his bankruptcy petition...

NOVEMBER 22--Last Friday afternoon, a bankruptcy court trustee reported that Juan Rodriguez was broke and unable to pay a dime to any of his creditors, to whom the New York man owed a total of nearly $45,000. Hours later, the 49-year-old parking lot attendant, whose savings account contained 78 cents, became America's latest megamillionaire, winning a $149 million lottery jackpot. Last month, Rodriguez filed for Chapter 7 bankruptcy protection, listing a variety of credit card debts and a small Internal Revenue service lien, according to the below federal court records. Rodriguez, who earns about $30,000 annually and has worked 20 years for a garage company, also had $50 on hand in addition to his paltry bank account (he has opted for a lump-sum payment of $88 million in Mega Millions cash). On Friday, a formal "report of no distribution" was filed with by a court-appointed trustee who requested that Rodriguez's bankruptcy petition be discharged since he had no means to repay his debts. It is unclear whether that determination may be revisited considering Rodriguez's subsequent change in fortunes

Court Decision Bolters Tenancy By Entireties

A decision by the Fourth District Court of Appeals strengthens asset protection afforded by tenants by entireties ownership. The issue presented to the court was whether proceeds from the sale of an asset owned as tenants by the entireties retains its character as entireties property when deposited in an attorney’s trust account. The creditor argued that once the sales proceeds were deposited in an attorney’s trust account the property no longer had all six unities necessary to constitute a tenancy by the entireties. The appellate court held in the case of Passalino v. Protective Group Securities, Inc., 2004 WL 2534222 (Fla. App. 4 Dist) that transferring entireties property to a trustee for the benefit of the husband and wife does not terminate the unities of title or posession, where the parties clearly intended their property to be held as a tenancy by entireties by their jointly exercising beneficial ownership of the property and jointly controlling the property’s ultimate disposition. Even where the husband or the wife, unilaterally, could order the disposition of the money held in trust the entireties characteristic is preserved.

Liability of Transferee for Creditor's Attorneys Fees

If a debtor fraudulently conveys property to a third party, and the creditor expends legal fees recovering the property in a proceeding supplementary, can the creditor recover its attorneys fees from the third party who received and was in possession of the property. The answer, is "no" according to the decision of Florida’s Fourth District Court of Appeals in the case of Gaedeke Holdings, Ltd. v. Mortgage Consultants, Inc., 877 So. 2d 824. The court said that attorneys fees may be taxed against the debtor, and the applicable statute has no provisions for assessing fees against third party transferees

Conveyance of Florida Homestead From Land Trust to Beneficiary

An email asked if the transfer of a personal residence from a land trust to the beneficiary of the land trust who resides on the property is a fraudulent conveyance under Florida law. I think that the transfer is not a fraudulent transfer under most land trust agreements. A land trust typically vests all beneficial ownership and use in the land trust beneficiary. The trustee holds minimal legal title, and the beneficiary retains total control over the trust property and the trustee. Even if the conveyance is deemed fraudulent, the result is that the residence once owned in the name of the beneficiary is exempt from creditors as a Florida homestead. The more important issue is whether the same property in the name of the land trustee has homestead protection. With the exception of one case to the contrary, most courts in Florida have extended homestead protection to a residence titled in a revocable living trust or a land trust where the beneficiary uses the property as his primary residence.

Homestead Protection for Foreign Businessman

A new client visited with me and presented a unique and interesting asset protection issue. The client is a British citizen who is living in Florida. He has a temporary immigration visa which is renewable. He owns approximately 120 contiguous acres of land consisting of six separate legal parcels. His primary residence, owned jointly with his wife, is situated on one parcel. Two separate parcels are used exclusively for a commercial business. The property is worth over one million dollars.

Homestead protection is not available because the client does not have a permanent visa. Homestead protection requires that the debtor has the intent to make the residence his permanent home. Courts have held that such intent cannot exist for people who lack the legal basis to permanently reside in Florida. A second problem with homestead for this client is the commercial use of part of the property. Although homestead extends to 160 contiguous acres in most cases, it only applies to residential use. Here, there are separate and distinct parcels which although contiguous to the residential parcel, themselves are used exclusively for business purposes. Even if the client had a permanent visa, it is likely that the only property which would be deemed homestead is that parcel of land on which his primary residence is located.

Husband's Homestead Plan Jeopardizes Wife's Assets

A client was contemplating what seemed to be a safe asset transfer that could have inadvertently subjected his wife to personal liability. The client had sold a company for substantial amounts of cash and then put half of the proceeds in a jointly owned investment account. The wife had substantial assets in her own name. Subsequently, the husband was sued. To protect their assets the couple used the joint account proceeds to purchase an expensive Florida homestead.

The homestead is absolutely protected from the husband’s creditor. The wife, however, still has problems. The conveyance of the business sales proceeds to the joint account amounts to a fraudulent conveyance to the wife of half of the amount. That the proceeds were invested in a homestead protects the homestead, but it does not cure the original fraudulent conveyance. The husband’s creditor may name the wife as a defendant in a fraudulent conveyance action since she is the transferee of one half the amount in the joint account. They will probably get a judgment against the wife for the amount of half the joint account. The wife then will be liable to the husband’s creditor to return to the husband and pay the creditor the amount of the judgment. Even though the creditor could not force the sale of the homestead to collect the fraudulent conveyance judgment against the wife, the husband’s creditor can attack the wife’s separate assets to satisfy the judgment.

Therefore, the husband’s conveyance of funds to a joint account on the way to a joint purchase of a homestead exposed the wife’s assets to significant liability. In anticipation of a judgment against husband, the better plan would be for the wife to sever the joint account and return the joint account money to the husband. Then, the husband could purchase the homestead. The wife’s return of the joint money undoes the fraudulent conveyance and provides her a good defense against any such lawsuit against her for her possession of the husband’s business sale proceeds.

Tenants by Entireties Joint Living Trust

I received an email from an attorney seeking my opinion on a joint revocable trust for the benefit of a husband and wife as tenants by entireties under Florida law. The issue is whether a couple can enjoy the asset protection of tenants by entireties within the framework of a joint revocable trust prepared for estate planning purposes.

I am not aware of any Florida court decisions on whether husband and wife can own beneficial interest in trust T by E. On one hand, the Florida Supreme Court said in the Beal Bank decision that all property owned jointly by husband and wife is presumed to be owned T by E, and the beneficial interest in a trust is a type of intangible personal property. What has always troubled me was the provisions in most joint living trusts which create separate and distinct shares for a husband and wife. There are several purposes for the separate and distinct shares in tax planning. The typical trust agreement says that property which is joint when contributed to the living trust is deemed owned half by wife’s share and half by husband’s share. Separate trust shares in a joint trust would undermine T by E. I assume that a T by E trust attempts to avoid that joint trust language or override it. I haven’t seen a joint trust that can guarantee both TE protection and the estate tax advantages of separate shares; although, I have seen some forms which attempt to do that and maybe some work.

It would be nice if someone with a small estate and creditor problems was willing to gamble on a T by E living trust and take any adverse decision to court so that there hopefully would be a favorable court ruling. I would not recommend that anyone with significant asset protection risk gamble their wealth on a joint T. by E. trust just because it might work in theory. I want to see someone else establish court precedent first. Asset protection is often at odds with good estate tax planning, and the client has to chose their priority and plan accordingly.