Florida Asset Protection Blog

Homestead Size Within A City

A caller asked me to explain the Florida homestead law limitation on the size of lots protected from creditors. Florida law protects 100% of the value of homestead properties situated within a Florida municipality so long as the homestead is located on a lot not greater than ½ acre in size. The caller asked me what the term “ municipality “ meant. A municipality is a "city" incorporated as a "city" under Florida law. The terms municipality and city are synonymous for homestead purposes. Other people who contemplate moving to Florida have asked me how they can determine if a property they are interested in purchasing is located within a municipality. The real estate listing agreement and the property tax assessors website should state whether any particular property is in a city. Look to see if property is assessed for tax purposes for municipal or city tax; if it is just assessed a county tax then it is in the county, not the city.

Some people are confused by post office addresses that refer to a properties location by its closest cities. In Florida, and probably in many other states, a property’s address may refer to a city even though the property is not situated within the boundaries of the city. For example, the City of Miami is actually a very small area although the a great number of properties located outside the municipal limits have the address of “Miami, Florida.” Only the properties located within the strict municipal limits of Miami (in this example) are limited to ½ acre homestead protection.

Homestead Protection for Duplex

A reader described a situation where a debtor owned and resided in ½ of a duplex and where the other owner did not reside in the other half unit. The reader asked whether the debtor could protect the entire building under Florida’s homestead laws because the entire building was located on a lot less than one-half acre within a municipality. I think that only ½ the total value of the building is protected, and more specifically, only the debtor’s unit is shielded from creditor’s under the Florida homestead laws. Each divisible unit must stand on its own legal footing. Because the other owner does not reside in his half of the building he cannot claim his part of the unit as a protected homestead.

Bankruptcy and Security Clearance

I have been asked more than once whether filing bankruptcy can adversely impact the debtor’s security clearance with a private business or government agency. Most lawyers state that a bankruptcy actually improves security clearance. The typical employer wants to make sure that financial problems do not lead to more serious personal problems affecting employment such as drug use, alcohol, or high interest borrowing. Bankruptcies solve financial problems, relieve stress, and usually improve concentration and performance at work. I am not aware of any federal law that makes bankruptcy an impediment to government security clearance.

Changing Your Name to Avoid Creditors

A caller asked me if a debtor could protect assets by legally changing his name and then conveying assets to his new legal name. He reasoned that this would not be a fraudulent conveyance because he was transfer title to himself, just under a new name. This was an innovative asset protection ideal, but it is not a good asset protection plan. The caller did not understand that the fraudulent conveyance statutes also include a prohibition on fraudulent conversions. A fraudulent conversion is when the debtor sells an asset that is not exempt from creditors and buys an asset which is exempt. An example would be selling publically traded common stock and purchasing an annuity. Annuities are exempt from creditors under Florida law. Fraudulent conversions can be undone under the same rules applicable to fraudulent conveyances.

I ever heard of someone trying this type of asset protection planning involving a name change, and there is no court decision directly on point. However, in my judgment, the caller’s idea of transferring assets to himself under a new legal name would probably be reversed as a fraudulent conversion.

Blog Gains National Attention

I received a kind comment from Kevin O'Keefe who is this country's leading authority on legal blogs as a result of my being mentioned and quoted in the business section of last Sunday's (January 16, 2005) New York Times. Link: Real Lawyers :: Have Blogs : Legal blog on niche topic brings solo practitioner national attention. Thank you Kevin for your generously kind comment.

Homestead Owned By Living Trust

I am frequently asked by clients who are in the process of estate planning whether they should convey their Florida homestead property to their living trust. I think it depends on the client’s circumstances. If estate planning is being done for a married couple there is little practical benefit to holding a homestead property in a living trust because upon the first death the surviving spouse automatically gets a life estate. If, as in most families, the homestead is owned jointly by husband and wife, the surviving spouse gets total ownership of the homestead. The disadvantage of ownership in a trust is the possibility that a court could rule that the property does not qualify for homestead protection under Florida law. The Florida constitution protects homestead property owned by a natural person. One bankruptcy case held that a living trust is not a natural person, and therefore, the property owned by the trustee of a living trust is not protected from creditors. Other courts have reached the opposite conclusion.

For single people with no minor children, the Florida homestead laws permit devise of the homestead to anyone the owner chooses. In that case, there may be estate planning advantages to having the homestead owned by a living trust because devise of the homestead is not controlled by the Florida constitution. Single people who are retired should not be concerned with asset protection if they have adequate liability coverage. For these people, estate planning has become more important at their stage of life than is asset protection, and I often recommend titling the homestead in their living trust.

Head of Household Protection With Adult Children

Florida statutes state that wages, salary, commissions and other compensation for personal services paid to the head of household cannot be garnished by a creditor. The “salary exemption” is an important part of Florida asset protection law. The definition of “head of household” has been the subject of numerous Florida court decisions. Recently, a client presented the issue of whether a divorced father can be a head of household if he provides more than 50% of the support for adult children, one of whom is married. Florida courts have stated consistently that wage garnishment protection should be liberally construed in favor of the debtor. Most courts have held that the term “child” in the wage garnishment statute does not have an implied age limitation, and that even an adult child whom the parent does not have a legal support obligation can be deemed a dependent for purposes of the statute on the basis of the parent’s moral obligation to care for his children.

As long as the child, even as an adult, depends on his parent for more than 50% of the child’s financial support, the parent can claim to be head of household. The parent need not be married, and the child need not reside in the same house as the parent. In fact, one court said the dependent child may even reside outside of Florida. Courts in Florida will look at the facts of each such case, and as long as the parent is providing most of the financial support to a dependent child, the parent can claim head of household protection from garnishment.

Thoughts About Single Member LLC

Asset protection benefits of a single member limited liability company are often challenged by attorneys who point to the Ashley Albright bankruptcy case where a Colorado bankruptcy judge permitted a trustee to seize the assets of a single member LLC. This case is used as the basis to advise Florida residents against relying on single member LLCs for asset protection.

An attorney colleague, Mr. Gary Forster of Winter Park, makes a good point in rebuttal. Gary argues that prior to 1997 Florida did not allow single member LLCs. At the same time, the state statutes limited creditor collection actions against an LLC interest to charging liens. In 1997, the Florida legislature changed the law to specifically permit a single member LLC, but the legislature did not change the law that limited creditor remedies to charging liens. Gary points out that if the Florida legislature believed that charging lien procedures and protections were any less applicable to a single member LLC it would have made the appropriate amendment when it authorized the single member LLC. By leaving the creditor remedy unchanged, the legislature showed an intent that the single member LLC was the beneficiary of the same protections afforded to all LLCs.

I agree with Mr. Forster that single member LLCs provide effective asset protection under current Florida law, although legal developments on this issue in Florida and other states may change planning recommendations.

LLC Planning and Due on Sale Issues

Asset protection plans which involve real estate include transferring title to real estate parcels to one or several newly created limited liability companies. When the real property being transferred to the LLC is subject to a mortgage these title transfers for asset protection purposes raise the issue of so-called “due on sale” clauses in the mortgage agreement. Clients are often afraid that their asset protection transfers to an LLC will cause their mortgage lender to accelerate the note and mortgage because the mortgage document states that the note is due in full any time title to the property is changed.

When an owner changes title to property to a new entity owned by the same owner where the owner remains liable on the note and there is not diminution in the value of the loan security, there is no additional risk or harm to the lender. In such cases, a due on sale clause amounts to an adhesion contract and arguably a restraint on trade. In any event, as a practical matter, lenders rarely, if ever, detect or enforce a due on sale provision where the borrower changes title to an entity he controls where there is no change in the underlying security.

The only way a lender could detect a change in property ownership to the client’s own LLC would be if the lender saw the change on the property insurance policy or the real estate tax records. Again, practically, lender rarely would investigate these documents so long as the loan is performing. I have helped clients transfer properties they own individually to other entity names for many years, and I have never experienced a lender even questioning the transfer. I have never heard of any case where a performing loan was called because of a title change for estate planning or asset protection purposes. I believe it is neither illegal nor immoral to assist clients with these planning changes in title because they cause no harm to the lender. If anything, protecting the borrower from liability protects the client’s assets that are the basis of his ability to repay loans. In sum, the risk of a conveyance to an LLC causing loan acceleration is very small.

Where the loan amount is large or where clients are conservative, most banks will grant permission in advance of a title transfer for planning purposes. The best plan is to buy investment property in the name of an LLC or partnership so subsequent title transfers are unnecessary.

A Plan to Reverse a Fraudulent Conveyance

A new client presented a plan to undo a potentially fraudulent conveyance. Client and spouse had used a joint line of credit from a bank to borrow money for several investments. Some investments made in companies owned solely by husband made a profit. These companies distributed some profits to husband who, in turn, conveyed the profits to other companies owned solely by his wife.

A creditor obtained a judgment against husband only. To undo what may be deemed a fraudulent conveyance of profits to his wife, the husband and wife borrowed more money from the same lender on the same line of credit and deposited the borrowed funds in wife’s solely owned company. The wife’s company distributed to the wife/owner funds equal to the amount of profit the company had first received from husband’s company, thereby, reversing the potentially fraudulent conveyance. The client wants to know whether this plan makes moot any fraudulent conveyance action against wife and her company.

I don’t think this reversal eliminates the problem because the transfer of funds and borrowing is too circular. Looking at husband’s and wife’s balance sheets after the conveyance, borrowing, and reversal, the husband’s balance sheet is the same after receiving the newly borrowed funds through wife’s company as it was just after he transferred profits to wife. The better approach would be for wife to borrow money in her own name on a separate line of credit from the joint line. The wife should use this money to reverse the fraudulent transfer. The fact that husband does not increase his debt in order to pay himself back eliminates the circularity of the reversal and makes the wife’s repayment of profits received easier to explain and defend.

Vulnerability of Out of State Financial Accounts (Part II)

Further thoughts on the same subject. Most of my clients are Florida residents who are threatened with Florida judgments. For these debtors, it makes no difference if their bank has out of state offices. But, for people moving to Florida from another state and who are threatened with lawsuits brought against them in their home state other than Florida, it makes sense to open bank accounts in Florida at local banks who do not have banking offices or branches in their home state. The same advice applies to new accounts at stock brokerage firms, although it may be harder to find a brokerage that does not do business in the state where a judgment is threatened.