Florida Asset Protection Blog

Swiss Annuities

I have recently encountered significant discussion of Swiss annuities. One client asked me to research their effectiveness in asset protection; another client, a U.K. citizen, said that he already owned two Swiss annuities which he purchased in the U.K. I asked other attorneys if their clients had used Swiss annuities in asset protection. Attorney Alan Gassman, of Clearwater, Florida, a very good asset protection and tax attorney, said that two of his clients purchased Swiss annuities. Other asset protection attorneys, however, responded that they had no experience with these instruments

have not studied Swiss annuities in detail, but this is what I have heard from the above mentioned clients and from internet research. All annuities, domestic or foreign, are protected from creditors under Florida statutes, although annuities purchases may be reversed as fraudulent conversions for a period of four years. Swiss law provides additional protections including prohibiting the Swiss insurance company from complying with U.S. court orders. More specifically, if the owner makes an irrevocable beneficiary designation to an entity such as an estate planning vehicle or a child, Swiss law would prohibit the insurance company from changing the designation if ordered to do so by a U.S. bankruptcy court. Swiss fraudulent conveyance laws have a one year statute of limitations unless the creditor can show actual intent to defraud. Florida has a four year statute of limitations. In addition, under Swiss law the creditor must show that the annuity beneficiary as well as the debtor had intent to defraud to extend the Swiss limit beyond one year; a difficult standard where the beneficiary was a child or trustee of an estate planning trust.

Swiss annuities from reputable Swiss insurance companies may be promising asset protection tools. After additional study, I would like to add a page on my website to discuss these annuities in more detail. Comments would be appreciated from anyone with more experience with Swiss annuities.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Homestead Protection of Jointly Owned House

I received an email from someone who wanted to know if he could claim homestead protection on a house he owned jointly with his parents. The questioner faced a potential judgment. The questioner and the parents lived together in this house. Florida homestead is not limited to one owner per property. All people who jointly own and also reside in a primary residence have homestead protection and no creditor of either of the co-owners and co-residents can force a sale of the property. If the questioner became a judgment debtor his interest in the residence and his parents’ interest would be protected from forced sale. If, on the other hand, the questioner/debtor was a co-owner but resided elsewhere his interest in the property owned with his parents would not be protected. His creditors could still not force a sale of the house if his house was his parents’ homestead residence. If all three co-owners voluntarily sold the house his parents’ share of the equity would be protected as their homestead interest, but creditors might have a lien on the debtor child’s share of equity

New Bankruptcy Law: Some Provisions Effective Immediately

The new bankruptcy law generally is not effective for six months after Bush signs it. Some provisions are effective immediately. One important change immediately effective is the $125,000 limit on protected homestead equity for those debtors who have owned their residence less than 40 months. Anyone with homestead equity greater than $125,000 and does not meet the 40 month waiting period and who is considering filing bankruptcy before the new bankruptcy law goes into effect should file bankruptcy immediately. The bill may be passed and signed in a couple weeks. File now and submit your completed schedules later.

The new bankruptcy law impacts homestead protection only in bankruptcy court and does not affect the homestead protection available in state court collection proceedings.

Anti-Duress Clause in a LLC

I had set up a single member limited liability for a client to hold his investment assets. The client asked that the LLC appoint a friend as manager. The friend was appointment as manager so the client would not hold discretion to make distributions which could be subject to a charging lien. The LLC agreement gave the members (client) the right to replace the manager. The client asked if he should insert an anti-duress provision in the agreement which would say that the manager would not make distributions under duress. These anti-duress clauses are usually found in offshore trusts agreements to prevent the offshore trustee from complying with U.S. court orders. Sometimes they work; often they do not work. I don’t think they would work with a domestic LLC because the manager, if a U.S. resident, would comply with the court to protect himself from contempt regardless of the anti-duress language.

I told the client that the LLC “asset” which could be attacked by his creditor was his right to vote in the LLC, particularly, his right to replace the manager. A creditor could convince a court to levy upon the LLC member’s voting right when the creditor’s remedy was otherwise restricted by statute to a charging lien. The creditor could then exercise the voting right to appoint itself (the creditor) as manager, and then the new manager could make cash distributions which the creditor could get under the charging lien. I have not seen this creditor attack used in Florida, but I have read that it has been successfully tried in another state. To prevent this collection device, the client would have to give up the right to replace the manager. This means if the client were unhappy with how the chosen manager is running the LLC the client could not oust him. Most people do not want to give up this much control over their assets.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Involuntary Bankruptcy A New Concern For Asset Protection

The new bankruptcy law will create a wide disparity between asset protection in state court venues and protection in bankruptcy court. Exemptions will be fewer and harder to defend in bankruptcy. An example is Florida homestead which will continue to provide immediate protection against state court collections, but which will not be protected in bankruptcy court until 40 months after purchase or payment of mortgage principal. The increase of creditor rights in the bankruptcy setting will encourage creditors in some instances to consider filing petitions for involuntary bankruptcy. A Florida resident who was successfully protecting his wealth against creditor collections in a large homestead property could find his homestead protection stripped away if forced into bankruptcy. If a debtor has more than twelve unsecured creditors, any three creditors can join in a petition to have the debtor involuntarily declared bankruptcy. In the past, involuntary bankruptcy is uncommon because petitioning creditors can be held liable for damages and debtor’s attorneys fees if their involuntary petition is denied for any reason. Involuntary bankruptcy will be a greater concern in asset protection planning after the new bankruptcy law goes into effect.

Bank Accounts in California

California is serious about collecting judgments. A gentleman called me from California last week to inquire about moving to Florida and transferring his bank accounts and his wife’s separate bank accounts to Florida bank accounts owned by he and his wife jointly. A judgment had already been entered against the caller by a California court, although his wife had not been named in the lawsuit. In Florida, as blog readers know, a creditor cannot garnish bank accounts owned jointly by the debtor and the non-debtor spouse because such joint accounts are presumed to be tenants by the entireties property. TE assets of Florida residence are protected from judgments against one spouse

The caller informed me that the California creditor had already garnished a bank account titled only in his wife’s name even though there was not judgment against her. The theory, as told to me, is that he has an interest in his wife’s account under California’s community property laws. If true, then in California one can lose their property by virtue of being married to a person with creditor problems. This concept is foreign to us in Florida because our state recognizes separate property of husband and wife. No way could a creditor attack assets of a non-debtor spouse unless the non-debtor spouse received property fraudulently transferred by the debtor spouse. This example illustrates how different asset protection practice varies among the states.

posted by Jonthan Alper, asset protection and bankrptcy attorney, Orlando, Florida

Asset Protection Trusts in Bankruptcy Reform

The Senate version of the Bankruptcy Reform Act included a compromise amendment curbing asset protection trusts. My understanding is that compromise amendment included in a debtor's bankruptcy estate subject to distribution among creditors the debtor's beneficial interest in a self-settled asset protection trust created within the past 10 years if the debtor had the "actual intent" to evade obligations to certain government agencies and regulations, such as securities regulation. The amendment did not distinguish domestic asset protection trust from foreign trust. Although foreign trust may be maintained outside U.S. court jurisdiction, a debtor's property anywhere in the world is subject to bankruptcy court jurisdiction. Subject to further analysis, it appears that the Senate may not have impacted the effectiveness of properly created asset protection trust against most creditor claims in bankruptcy.

Garnishment Protection For Owner/Employee

Previous blog entries have discussed issues concerning wage exemption from garnishment for single owner businessmen or professionals. In short, there are cases in Florida that say that creditors can garnish wages paid to a person who is the sole owner of his employer. These cases pertain to doctors/lawyers/dentist who are solo practicioners and who draw a salary form their professional corporation or businessmen who are the sole owners of their own corporations or LLCs even when the debtors are head of family. The Florida cases held that the sole owner has too much control over his business and distributions to qualify for wage garnishment protection which, the cases say, is designed to protect people who earn compensation from an arms length relationship with an employer. The cases previously discussed in other blog post involved “bad facts” including lack of a written employment agreement and varying amounts to distributions to the debtor rather than fixed amounts of periodic payments usually associated with arms length employment.

Anyway, I came across a reference to a New Jersey court case which supports salary exemption for small businessmen and professionals taking distributions from their corporation. The New Jersey case of Zavodnick v. Leven, 773 A 2d 1170, said that distributions (not salary) from a law firm partnership to one of the partner attorneys should be afforded the same garnishment protection under New Jersey law. The court said that even though profit distributions are not technically wages they play the same role in the partner’s life as wages paid to the firms’s employees in that the partner and his family depend on his distributions to purchase food, shelter, and other basic necessities for himself and his family. The debtor should not be denied protection from garnishment just because of the profession he has chosen to earn his living. Hopefully, this case will be used to persuade a Florida court to extend the statutory protection form garnishment afforded heads of families to professionals or people who work through their own single owner companies.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

New Bankruptcy Law and Domestic Asset Protection Trusts

The Wall Street Journal and other sources reported that the new bankruptcy law protects property held in domestic asset protection trusts. My understanding is that the new law ( and I haven’t read it) does not mention domestic asset protection trust. An amended was proposed to specifically deny protection of these trust assets in bankruptcy. The amendment was defeated. By defeat of the amendment, the Senate expressed its intent not to include in the debtor’s bankruptcy estate the beneficial interest in a properly formed domestic asset protection trust. I have not seen anything to suggests that these trust would be protected from the bankruptcy trustee’s allegations of fraudulent conveyance, or that a trust reserving excessive control to the debtor (as most trust do) would not be included in bankruptcy estate property. The status of asset protection trust under the new bankruptcy law is more complex than it appears to be in the newspapers.

Holy Smokes !! Bankruptcy Laws About to Change

The Senate’s immanent has been widely reported in the press. The bill proposes an effective date six months after it is signed by the President. The bill is extensive and complex, and it will have some Florida asset protection consequences. It is important to remember that the new bankruptcy law is only applicable when a debtor chooses to file bankruptcy. None of the bankruptcy reform act impacts Florida’s asset protection provisions of the Florida constitution or Florida statutes. Therefore, the Bankruptcy Reform Act should not affect asset protection planning against state court collection efforts. The primary impact upon Florida asset protection appears will be felt by those debtors who move to Florida with the intention of buying a homestead and subsequently filing bankruptcy. Under current bankruptcy law, a debtor from another state who establishes Florida residency must wait at least twelve months after purchasing the Florida homestead before filing bankruptcy. The new bankruptcy law extends the waiting period to 40 months.

I will continue to post comments about the new bankruptcy law as the law is studied and explained.

posted by Jonthan Alper, asset protection and bankruptcy attorney, Orlando, Florida.

Homestead Ownership During Construction

A caller wanted to purchase a residential lot and then build on the lot his primary residence. The caller was about to go into default on a substantial amount of credit card debt and was concerned about creditors taking the lot prior to his ability to complete and occupy a house.

Several entries on this blog have pointed out that homestead protection is not effective until a property is occupied, and that houses under construction are not protected. This caller proposed to take title during construction in a separate LLC and then convey title to himself personally when a certificate of occupancy was issued. If a judgment was entered against the debtor prior to occupancy and homestead protection the judgment would not attache to the LLC. Moreover, the debtor’s interest in the LLC could not be taken by creditors. Once the debtor is ready to move into the property he would have to convey title out of the LLC to himself personally because homestead protection is not available to LLCs or other legal entities other than natural persons.

One thing this caller did not understand at first was the length of time it would take a typical credit card company to obtain a judgment. Once credit cards go into default banks usually try to use collection agencies paid on contingency to collect debts. The credit card companies will avoid the expense of paying collection attorneys for at least several months after initial default. Not all credit card companies will file collection suits. Those suits that are filed can be delayed many months by skilled defense attorneys. I pointed out to this caller that it he took defensive action it would probably be nine months or more after initial credit card default before a credit card company could get a judgment. By that time his house would probably be complete. If my time estimate is correct he would not have to take title in an LLC pending construction and could avoid legal cost of LLC creation and documentary stamps for title transfer.

On the other hand, if a creditor achieved a judgment faster than my estimate, the judgment would immediate attach to any real property titled in the debtor’s name. Once a judgment attached to the building lot the lot could not be protected as homestead property by subsequent occupancy. We decided that the conservative plan would be to purchase the lot in an LLC where it would he held until occupancy.

Request For IRA Knowledge

A caller from California asked me whether Florida law would protect from creditors a Florida property owned by a Florida LLC which in turn was owned by the caller’s self-directed IRA. I responded that Florida law exempting IRAs from creditors would not apply to this California resident, although because the real estate would be situated in Florida the creditor remedy may be limited by Florida law which makes charging liens the sole remedy to pursue a member’s LLC interest. I have not researched this issue, and it could be that a California court may give a creditor greater rights to levy on the LLC interest.

What was more interesting was the caller’s understanding that an LLC owning investment real estate could be held in an IRA. I am not an expert in income tax law, but other people and some tax professionals have stated that IRAs could not own investment real estate. The possibility of purchasing investment property through an IRA would give Florida residents another planning tool for protected real estate investment.

If you, the reader, is knowledgeable about income tax regulations pertaining to IRAs I would appreciate an email to let me know if some IRAs can be used to own investment real estate. Thanks in advance for your feedback

N.Y. Times Article on Domestic Asset Protection Trusts

The N.Y Times ran an article on the proposed bankruptcy reform legislation now being debated in the U.S. Senate, and it said the law failed to close loopholes created by domestic asset protection trusts which are provided for by statutes of several states including Alaska, Delaware, and Utah. The Times quoted experts who stated that the new law would not stop people who had established domestic, as well as offshore, asset protection trusts from protecting their assets in bankruptcy.

These commentators are correct in theory, but their comments may not apply to most real life asset protection planning. First, most asset protection trusts are not set up correctly. Because most debtors fear relinquishing control over their assets to a third party trustee, debtors usually insist that either they or a closely related family member serves as trustee or that they at least retain the right to remove and replace their trustee. When a debtor files bankruptcy all of his interests and rights are turned over to the bankruptcy trustee including, if applicable, his control over the trust or his control over the trustee of the trust. Bankruptcy courts can force the debtor to exercise his retained control to appoint the bankruptcy trustee as trustee of the asset protection trust.

Another issue with domestic asset protection trust is whether Florida courts will recognize the statutory rights given debtors in the protective states to protect a trust the debtor himself sets up for his own benefit. Florida law considers these so-called self settled trust contrary to public policy. Lastly, many debtors establish these trust and then delay in transferring assets to the trust until they are sued. Any transfer to a domestic or foreign asset protection trust within one year of bankruptcy may be grounds for denial of discharge as a fraudulent conveyance, or if done more than one year but less than four years prior to bankruptcy, may be subject to reversal and recapture by the bankruptcy trustee.

Using domestic asset protection trusts to protect assets in bankruptcy requires detailed planning, expert legal advice, and planning many years prior to bankruptcy filing.