Florida Asset Protection Blog

Landlord Not Covered By Insurance Policy

I spoke with a prospective client who owned rental apartments and who was threatened by one of his tenants with a lawsuit. The tenant alleged he suffered damages because the landlord failed to make repairs to the rental unit which caused the unit to be inhabitable. The tenant said he was suing for emotional distress suffered by his family and would seek punitive damages to teach the landlord a lesson. The client had liability insurance of $3 million. I asked why he needed asset protection if he was insured. The client said his insurance policy did not cover damage from emotional distress or punitive damage awards. The incident illustrates the limits of many insurance policies. Most liability insurance covers damages from negligence, but it may not cover extraordinary damages on theories such emotional distress or punitive damages for intentional wrongs. Your adversaries have no obligation to limit their lawsuits to legal theories covered by your insurance policies, and your insurance company will do whatever it can to exclude your lawsuit from coverage.

Living Trusts: Entireties and Fraudulent Conveyance Issues

A consultation today brought up an interesting issue about the effect of living trust estate planning on tenants by entireties and other asset protection issues. The client is a prospective defendant in a lawsuit. The client and wife have a joint living trust for which they are both trustees. The trust agreement divides their property between the husband’s trust share and the wife’s trust share. An appendix lists specific property in the husband’s share. We discussed the following issues. Is it possible to claim tenants by entireties to joint trust property where property is allocated within the trust to either spouse individually? I think probably not. In the event the husband and wife as trustees convey cash from the joint trust bank account to an account outside the trust titled husband and wife, when the trust’s cash account is specified as husband’s asset, is that a fraudulent conveyance from the husband to a joint account? Is the cash now jointly owned because it is in a joint trust account, or is it the husband’s property because the trust agreement allocates ownership to the husband? I think a creditor would have a valid argument, and the result is uncertain.

A consultation today brought up an interesting issue about the effect of living trust estate planning on tenants by entireties and other asset protection issues. The client is a prospective defendant in a lawsuit. The client and wife have a joint living trust for which they are both trustees. The trust agreement divides their property between the husband’s trust share and the wife’s trust share. An appendix lists specific property in the husband’s share. We discussed the following issues. Is it possible to claim tenants by entireties to joint trust property where property is allocated within the trust to either spouse individually? I think probably not. In the event the husband and wife as trustees convey cash from the joint trust bank account to an account outside the trust titled husband and wife, when the trust’s cash account is specified as husband’s asset, is that a fraudulent conveyance from the husband to a joint account? Is the cash now jointly owned because it is in a joint trust account, or is it the husband’s property because the trust agreement allocates ownership to the husband? I think a creditor would have a valid argument, and the result is uncertain.

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

Tax Effect of Bankruptcy Law

The new bankruptcy law includes provisions with income tax effects. Milt Baker, a Michigan CPA has a discussion on how the Bankruptcy Reform Act affects traditional tax planning vehicles such as retirement funds on his tax blog called CPA Sense. Link: cpasense.

How Not To Move To Florida

A Colorado client/defendant had his move to Florida stymied by his creditors. The story is an example of how not to move to Florida. The defendant owned a house and financial accounts in Colorado where a lawsuit against him is pending. No judgment has been entered. The defendant purchased a house in Florida and moved into the Florida house. The Colorado house was put on the market. The creditor found out the client had moved into his Florida homestead.

Even though there was no money judgment against the defendant, the creditor filed a petition with the Colorado court to freeze the defendant's Colorado assets. The court issued an order freezing his financial accounts in Colorado and his Colorado house. The creditor also asked the court to appoint a receiver over the defendant, personally, and all his property whether located in Colorado or Florida. This is the second time this year I have seen a creditor in another state create a receivership over a Florida resident. I have talked to several Florida attorneys about this issue, none of whom believe a Florida court will enforce a foreign receivership. Yet, the client still faces possible contempt of court if he does not appear in Colorado in his receivership case, and enforcement in Florida is undecided.

This example shows that moving to Florida has pitfalls if not done properly. Residents of other states should first liquidate or encumber real property in their home state before buying a Florida homestead. Financial accounts should be liquidated and moved to Florida before announcing change in residency. Creditors know it is difficult to collect unsecured judgments in Florida, and they will take aggressive measures to stop a debtor from leaving the state where litigation is pending.

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

LLC vs. Family Partnership: Best Asset Protection Tool

Family partnerships and limited liability companies have similar asset protection benefits for the owner who is, respectively, a partner or member. Florida statutes limit the creditor’s remedy to a charging lien against the debtor’s ownership interest. I am often asked which entity provides better asset protection. Sometimes people asks to compare a family limited partnership to an offshore LLC.

The best entity for asset protection depends on several factors that vary case by case. For an example, an individual business owner cannot transfer his business to a partnership unless he brings another owner into his business; a partnership requires at least two owners. If two businessmen own a business and one is in poor health a partnership may not be appropriate because if the ill owner dies there will only be one partner remaining . The partnership will dissolve unless the decedent’s shares pass to his heirs, but the other original owners may not want to be partners with heirs. The LLC offers flexibility to the extent it allows for one-person ownership.

On the other hand, partnerships have for a long time been used in estate planning to reduce estate taxation. Limited partnerships offer significant estate tax and income tax opportunities. For this reason, they may provide better protection against fraudulent conveyance allegations. If a debtor is asked why he transferred assets to a limited partnership, he could use estate tax advantages as a credible explanation rather than creditor protection. Estate planning motivation is harder to explain for transfers to limited liability companies, especially single member LLCs.

There are other contrasts between these asset protection tools. What is best for one person may not be the right choice for the next person.

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

Florida Supreme Court Issues Doc Stamp Decision

A recent blog post discussed the Department of Revenue’s position on documentary stamps for transfers of real property in asset protection planning. Asset protection often involves conveyance of real property you own individually to your partnerships and limited liability companies . In the past, the Department was insisting on your paying documentary stamps where the legal entity that received the property was owned by the same individuals who owned the property to begin with. Recently, according to the recent post, the Department has retreated from its position and had imposed tax on such transfers only to the extent of a mortgage balance, if any, encumbering the property.

Last week, the Florida Supreme Court issued a legal opinion which affirmed the more liberal ruling of the documentary tax statute. The Supreme Court said that, “the transfer of property between a grantor and its wholly owned grantee, absent any exchange of value, is without consideration or a purchaser and thus not subject to the documentary stamp tax in section 201.02(1).” Transfers to wholly owned entities will be taxed on the amount of mortgage liability consistent with prior rulings of the court. This decision makes asset protection planning less expensive for people who own Florida real property. Crescent Miami Center, LLC v. Florida Department of Revenue No. SC03-2063.

posted by Jonathan Alper, asset protection and bankruptcy lawyer, Orlando, Florida.

Is Commercial Activity on Florida Homestead Permissible?

Waiting for a hearing to be called in bankruptcy court I had a conversation with an attorney who was litigating a Florida homestead issue. The question was whether a debtor who owned a duplex and occupied one of the two units could exempt the entire property under Florida’s homestead exemption. The general issue is whether homestead protection is lost when an owner uses part of the property from rental or other income producing commercial purposes.

The answer to the question may depend on whether the homestead is located in a municipality or in the county. Although the most important city/county difference is the permissible size of the homestead property ( ½ acre city and 160 acres county). the location difference also affects the extent of permissible commercial uses. The Fourth District Court of Appeal decided a case in 2004 on point. The Court found that the Florida Constitution limits the definition of homesteads within a city to properties used as the residence of the owner and the owner’s family; inside a municipality any part of a property used commercially may not qualify as homestead. The Court explained that properties outside a municipality are not limited in use to the residence of the owner and his family. In the particular case, the Court granted homestead protection to a large mobile home park located in the county because the park’s owner resided on a small portion of the property.

Davis v. Davis 864 So 2d 458

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

Florida Homestead and IRS

I just finished responding to following email about Florida homestead protection and IRS debts:

“My friend informed me that in Florida a qualified homestead was exempt from legal judgments and that the law was very broad. He stated that a principal residence was protected from forced liquidations. He went on to state that the law was even good against IRS debts. I found this to be very hard to believe.”

Don’t believe it. If you owe income or payroll taxes the IRS tax lien encumbers all your property including a Florida homestead. The Florida constitution prevents the IRS from foreclosing the lien and forcing you to sell your primary residence. When you sell the house, or when the owner(s) dies, the IRS will take sale proceeds to pay the tax lien. Other exceptions to homestead protection are voluntary liens, such as mortgages, and mechanics liens for work done on or goods supplied to your principle residence.

Making Financial Statements Work For You

I received my bank's annual request asking that I redo personal financial statement in order to extend my firm’s line of credit. My first reaction was to treat the request an a bureaucratic annoyance; I already supplied copies of my tax returns and the bank knows that my outstanding loan balance is minimal compared to income and assets. Upon further consideration I realized that this annual personal financial statement can play a very positive role in maintenance and substantiation of an asset protection plan, and I appreciated the opportunity to describe my asset ownership to a friendly creditor.

After obtaining a judgment award, one of the first set of documents a creditor seeks from the debtor are all financial statements submitted by the debtor to any lender in recent years. The creditor uses the debtor’s own financial statements to discover assets and to show how the debtor previously described the value and ownership of his assets. Most people inflate asset values when submitting financial statements to banks, and more important, most people are not careful to accurately describe the nature of their ownership interest. Creditors demand that debtors explain any discrepancies between assets owned and valued on prior financial statement and the assets otherwise disclosed in depositions in aid of judgment execution. Financial statements to lenders that inflate net worth can themselves undermine otherwise carefully planned asset protection.

Financial statements should be used as a tool in your your asset protection planning. Clients should complete financial statements assuming they will someday be shown to a judgment creditor. Use the financial statement as an opportunity to bolster your asset protection plan. Rather than bragging to banks about your wealth on a financial statement, value your assets conservatively so that asset values are no higher than what reasonably is required to substantiate a loan request. If you own assets in a limited liability company or partnership make sure your financial statement shows that you own interests in the entities and does not state, incorrectly, that you own the underlying asset itself. Be careful to list only your 50% interest in those accounts owned jointly with your spouse resisting the temptation to claim the entire account as your own asset. All legal entities, ownership structures, and encumbrances which are part of your asset protection plan should be clearly stated on each and every financial statement you ever complete. Be very conservative and be very precise in completing these forms.

posted by Jonthan Alper, asset protection and bankruptcy lawyer, Orlando, Florida

Tenants by Entireties Can Be Effective Estate Planning

Tenants by entireties may be used for asset protection without diminishing other estate planning goals according to a Private Letter Ruling issued by the IRS late in 2004. Estate planning attorneys typically recommend that spouses divide ownership of property to the extent necessary for each spouse to take advantage of their individual estate tax credit ($1.5 million today). Because tenants by entireties property has the legal property of survivorship all marital assets owned tenants by entireties automatically pass to the surviving spouse. Consequently, the deceased spouse is unable to apply his estate tax credit to property owned during his lifetime with his spouse as T by E. All tenants by entireties is subject to taxation at the death of the second spouse who has available only one estate tax credit to cover all the property. Tenants by entireties is thought to provide good asset protection but poor estate planning. Up until now people with taxable estates had to choose between the asset protection benefits of entireties ownership and the estate tax benefits of separately owned property.

According to Private Letter Ruling 200503024 the surviving spouse may disclaim their survivorship interest in property owned jointly with the deceased spouse with rights of survivorship. Each spouse can execute a pour-over will which provides that all property passes on their death to a living trust which contains a credit shelter trust to utilize their estate tax exemption. The surviving spouse can disclaim enough tenants by entireties property upon the first death to fully fund the decedent’s credit shelter trust. This way the spouses have tenants by entireties from creditors during their lifetime and fully utilized estate tax credits upon their deaths. Alan Gassman presented this planning tip during his presentation at the Florida Bar’s Wealth Protection Conference in Miami on May 13, 2005.

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

New Guidelines For Documentary Stamp Tax On Real Estate Transfer

I attended the Florida Bar’s annual asset protection conference in Miami where I spoke on the topics of attorney ethics in asset protection and the effect of the new bankruptcy law. The conference gives me the opportunity to get news and updates from the best asset protection attorneys in the state. Stuart Morris and Alan Gassman , both very smart attorneys from Ft. Myers and Clearwater respectively, state that the Department of Revenue has reversed its position on imposing documentary tax on type of real estate transfers often involved in asset protection. The Department had been imposing tax on the entire fair market value of properties transferred to asset protection entities even where the ownership of the protection entity was the same as the current ownership. This position imposed a significant cost on common planning transactions involving real estate such as a client’s conveyance of a property he owns to a new limited liability company or family partnership owned 100% by the same client. After suffering more than one defeat of its position in court cases the Department of Revenue, according to Stuart and Alan, now seeks documentary tax only on the amount of mortgage on transferred property. If the client owns the property free and clear, he can transfer title to any asset protection entity without any doc stamp tax.

Can Spouses Have Separate Protected Homesteads?

A caller asked me today whether he and his wife can move to Florida and maintain two homesteads, one for each spouse. The answer is that a husband and wife living separately can each protect unlimited amounts of money in their own Florida homestead. The caller said, when asked, that in fact he and his wife would continue to live together in one of the homesteads and also maintain joint financial assets. I explained that a creditor could easily establish that they were in fact living together in just one of the houses. In that event, the second house which neither of them occupied as their principal residence would have no homestead protection. If the second house were owned jointly it would still be protected from individual creditors of either spouse because it would be tenants by entireties property. The purchase of the second home could be challenged as a fraudulent transfer if the purchase money came from the debtor spouse because purchase of tenants by entireties property, unlike homestead, can be undone as a fraudulent transfer or conversion.

Involuntary Bankruptcy May Be Impossible Under New Bankruptcy Law

Previous Blog posts have discussed fears that once the Bankruptcy Reform Act is in effect on October 17, 2005, more and more creditors will try to force people into involuntary bankruptcy in order to strip debtors of exemptions otherwise available under Florida law. For example, many debtors with expensive homes who enjoyed unlimited homestead protection in state court would forfeit homestead protection above $125,000 if they were forced into bankruptcy court by a creditor who filed in an involuntary petition. One creditor with an undisputed and liquidated claim for $12,000 can file a petition for involuntary bankruptcy. However, upon further review, fears of involuntary bankruptcy epidemic under the new bankruptcy law may be exaggerated, and in fact, the new law may make it even more difficult for creditors to impose bankruptcy upon individuals.

Section 109 of the Bankruptcy Code describes who may be a debtor. The new subsection 109(h)(1) states that an individual may be a debtor only if the individual first complete a “briefing” from a nonprofit budget and credit counseling agency. There is no provision of the new law which gives a creditor, a trustee, or a court the right to compel an individual to get a credit briefing. It seems logical that an individual who has not had his credit briefing can not voluntarily or involuntarily be a debtor under the Bankruptcy Code. This credit briefing requirement may make involuntary petitions against individuals moot, and a creditor who files an involuntary petition against a debtor who has not submitted to a credit briefing would seem to be in “bad faith” and would subject the creditor to sanctions.

posted by Jonthan Alper, asset protection and bankruptcy lawyer, Orlando, Florida

Effect of Bankruptcy Reform on Asset Protection

Steve Leimberg’s newsletter issued on May 3, 2005, provided another analysis of the effect of the new bankruptcy law on asset protection planning. The newsletter entry written by Jay Adkisson and Cris Reiser states that the new bankruptcy law changes the debtor-creditor paradigm. Prior to the Act, the authors note, a debtor could threaten a creditor with bankruptcy. After the Bankruptcy Reform Act, creditors will likely threaten to force a debtor into bankruptcy so, “the debtor’s assets can be picked clean.” The authors state that new asset protection plans should be designed to avoid bankruptcy and keep assets out of the bankruptcy estate in the even of a creditor’s involuntary petition

I have commented before in the Blog that the core issue under the new bankruptcy law is the criterion for involuntary bankruptcy. The standards for court approval of involuntary bankruptcy petitions vary among courts throughout the country. Bankruptcy law is very much local law where the law is established district by district by bankruptcy judges. One critical issue, overlooked by many commentators to date, is the common requirement that involuntary bankruptcy is far from automatic and involuntary petitions must be filed by creditors in good faith. Most courts have stated that involuntary bankruptcy may not in good faith be used as a collection hammer by an aggressive creditor, and the involuntary bankruptcy must serve a bankruptcy purpose, i.e, it must benefit creditors as a whole. Oversimplification of involuntary bankruptcy rules will lead to misguided asset protection planning.

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

Comment on Delaware LLC

I received an interesting comment about Delaware Series LLCs from a reader named David. I want to post the comment in its entirety because it is an interesting insight on the effective use of the Delaware LLC in asset protection planning:

At this point in time, you should use the Delaware Series LLC as a holding company. If you own stock, use a separate series for each different company stock you own. With regard to real estate, if you own real estate in California and place it in a Delaware Series LLC, it will still be under the jurisdiction of a California Court. And the California Court may not respect Delaware Law. So my point is simple, set up a brokerage account in Delaware, have a nominee officer from Delaware operate your business. If there is ever a lawsuit, your adversary would have to file a claim in Delaware. And I would bet you a million dollars that the Delaware Courts would uphold the statutes which make the Delaware Series LLC such a formidable asset protection tool. This is an asset protection tool which will provide maximum protection only when used properly. I wouldn't use it to hold it any real property outside of Delaware. This tool has its limitations. Respect those limitations and yo u shall be nicely rewarded. Don't "overuse" of over extend yourself with the Delaware Series LLC. Set it up such that it strictly does business in Delaware. The bottom line is if you get sued, you want to fight it out in Delaware!

I have previously commented that Delaware LLCs have not been approved by any Florida court to provide effective asset protection. David's comments shows how a Florida debtor could incorporate the Delaware LLC into an asset protection plan. Thanks for the comment.

Fifth District Court Rules That Fraudulent Conveyance is Not A Tort

Committing a tort in Florida subjects the tort doer to the jurisdiction of Florida courts under Section 48.193 of the Florida Statutes. The Florida Fifth District Court of Appeal issued an opinion on April 28, 2005, stating that a fraudulent conveyance is not a tort. The Court cited a same conclusion by the Third District and a consistent opinion by the Florida Supreme Court. The Supreme Court said that Florida’s fraudulent conveyance statutes provide for recovery of transferred property but do not create the basis for an independent action for damages; damages are an essential element of any tort. Based on this precedent, the Fifth DCA said that a corporate officer whose corporation receives fraudulent conveyed property does not commit a tortious action in Florida. This conclusion further cements the Florida law to the effect that fraudulent conveyances are distinct from common law tortious fraud, and that third parties cannot be held liable for assisting a transfer later reversed under Florida’s fraudulent conveyance statutes.

The Fifth DCA stated at the end of its opinion that it would, “leave it to the Legislature to remedy what appears to be an oversight in the enactment of the legislation.” It is unclear whether the Court suggests changing Section 48.193 provisions concerning jurisdiction or changing the remedies provided under the fraudulent conveyance statutes. The cite is Brown v. Nova Information Service. Case No. 5D04-3774.

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

Overly Concerned About Homestead In New Bankruptcy Law

Changes to homestead protection in bankruptcy have been the focus of initial comments about the Bankruptcy Reform Act’s effect on Florida debtors seeking bankruptcy protection. Specifically, homestead protection is limited to $125,000 for debtors who have lived in the house and previous homesteads less than 40 months. I think an even bigger impact of the new bankruptcy law will come from the “forum shopping” provisions. New Section 522(b)(3) specifies that the state law governing exemptions in bankruptcy is the state of domicile during 730 days (two years) before filing. If the debtor did not reside in a single state for that period, the governing exemption law is the place of domicile for the majority of 180 days preceding the two year period. Many people who file bankruptcy in Florida are new residents. These newcomers will be unable to claim in bankruptcy not just Florida’s homestead protection but none of Florida’s other exemptions including annuities or tenants by entireties protection unless these assets were exempt in their prior domicile. (IRA and pension exemptions are available to all debtors under the Bankruptcy Reform Act)

Another reason the concern about homestead in bankruptcy is exaggerated is that most debtors use second and third mortgages on their homes as their initial option to pay bills and only when home financing fails do they consider bankruptcy. Few people who file consumer bankruptcies have home equity over $125,000 because their equity has already been tapped as their first debt solution.

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