Florida Asset Protection Blog

Florida LLC vs. Nevada or Delaware

I received an email today from a blog reader who is interested in establishing a limited liability company for asset protection purposes. The reader suggested that Florida may not limit creditor remedies to charging liens against LLC interests and that Florida residents are better served by an LLC created in Nevada or Delaware.

In almost all cases, I find no advantage for Florida residents to filing an LLC in states other than Florida (with exception of Delaware series LLC in special cases). The Nevada and Delaware LLC laws are “sold” on the internet as asset protection tools, and many people have sought out these LLCs. The Florida statutes specifically provide LLCs the same asset protection as available to limited partnerships. People in Florida should not pay more money for an LLC located in any other state.

Which Is Better For You: Old Bankruptcy Law or New Law?

Many people are scrambling to file bankruptcy before the new law goes into effect on October 17, 2005. The New York Times, Orlando Sentinel, and other Florida newspapers have recently published articles about the increase in new filings. Yet, many new Florida residents would fare better if they waited until after October 17 and filed under the new law. The reason is that bankruptcy debtors who moved to Florida within the past two years would be treated under the exemption laws of their previous state of residence or the standard federal exemptions. Florida has a particularly generous homestead exemption, but the exemptions provided by some other states and the federal exemptions are more liberal for other types of assets. For example, the federal exemptions protect in bankruptcy $15,000 of homestead, $2,400 of vehicle equity and $1,500 tools of trade whereas Florida statutes provide only a $1,000 vehicle exemption and no exemption for tools of trade. A new Florida resident who rents or who has little homestead equity, but who has a valuable car may do better in bankruptcy after October 17, 2005.

The new bankruptcy law makes filing bankruptcy much more complicated. Anyone now considering bankruptcy should make sure they discuss all options with a bankruptcy attorney and should not assume that filing under the old law will be in their best interst.

Are Withdrawals From Retirement Accounts Protected?

A called asked about protection whether proceeds withdrawn from tax qualified retirement plans remain protected afer the money is out of the retirement plan. Florida statutes protect IRAs, 401k plans, and other tax qualified plans. If the retiree has a judgment against him the creditor cannot reach money so long as it is held within the plan. In most cases, withdrawals from these plans are deposited in the retiree’s personal bank accounts. While proceeds withdrawn from annuities remain protected so long as they are traceable, the same may not be true for retirement proceeds. An good argument can be made that retirement money is protected after withdrawal, but the case law is inconclusive. Presently, retirees concerned about continued asset protection of retirement benefits should develop an asset protection plan which includes a financial account or legal entity to safeguard retirement withdrawal. Conveyance of retirement money directly to another entity should not be vulnerable to fraudulent conveyance attack as long as the retiree does not hold title individually after withdrawal and before the conveyance.

Adding Protection to Single Member LLC

I have received many inquiries about asset protection of a single member LLC. Many attorneys and debtors are concerned about bankruptcy decisions in a few states which have allowed creditors to seize the membership interest of a single member LLC despite statutes in those states which, like Florida statutes, limit creditor remedies to a charging lien. I have previously commented in this Blog that this is an area for Florida debtors to watch, but that planning in Florida should not be dictated by isolated bankruptcy decisions in other states. I often use a medical analogy to explain my views to clients: in medicine, doctors do not immediately change established treatment protocols based on one or two contrary studies or adverse outcomes.

Nevertheless, those who wish to avoid the risk that a membership interest in a single member LLC may be attacked in some Florida court can employ a possible “fix” using a popular estate planning tool known as the intentionally defective grantor trust. A grantor trust is a trust which for income tax purposes is treated the same as its settlor. The fix involves setting up a two member LLC where one member is the business owner and the other member is the grantor trust established by the business owner. The grantor trust could have other family members as beneficiaries, and the trust would own a small interest in the LLC. Since the grantor trust is disregarded for income tax purposes, the IRS should treat this LLC as a single member LLC although for state law purposes it has two members. This arrangement would give the debtor a basis to distinguish the LLC from those single member LLCs which were subject to the adverse court rulings, but it would not change significantly the business structure and taxation.

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

Judge Invalidates New Bankruptcy Laws Homestead Limitations

One of the first bankruptcy opinions, if not the first opinion, interpreting the new bankruptcy law’s homestead provisions was issued by an Arizona bankruptcy judge. The judge ruled that the $125,000 homestead limitation applicable to debtors who acquire their property within 40 months of filing bankruptcy is not applicable in states like Arizona, or Florida, that have opted out by statute of federal bankruptcy exemptions. Based on this court decision a Florida resident filing bankruptcy under the new law, regardless of when he purchases his Florida homestead, still enjoys unlimited homestead exemptions under the Florida constitution.

The judge pointed out that the new bankruptcy law’s limitations on homestead exemptions applies only to debtors who elected to exempt property under the laws of their state of residence rather than the federal system of bankruptcy exemptions. . Since Florida laws requires bankruptcy debtors to opt out of the federal exemptions, the judge concluded, no debtor in states like Arizona or Florida could “elect” state exemptions- the election has already been made by the Florida legislature.

This decision is not binding on Florida bankruptcy courts, but the reasoning is creative and the decisions can be used as judicial precedent in our state. If this reasoning is followed by Florida bankruptcy judges it should allay fears of debtors being forced into involuntary bankruptcy in order to strip them of Florida’s homestead protections. The case is In re: McNabb Case No 0-05-07495-RJH, District of Arizona.

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

Canadians Want Florida Homestead

A married couple are both Canadian citizens, but they reside in Florida during six months of the year. They asked me whether their Florida home would be protected by Florida’s homestead laws in the event they were sued and the creditor recorded a Florida judgment.

Protection of a Florida house requires not only that you reside in the house, but that you intend to make the house your permanent residence and Florida your place of domicile. As long as the Canadians remain citizens of Canada and do not obtain at least a green card entitling them to permanently remain in the U.S. they probably could not claim Florida as their permanent residence as they do not have the legal right to live here on a permanent basis.

Article on Involuntary Bankruptcy Under New Law

I read an interesting article this week on involuntary bankruptcy in the American Bankruptcy Institute Journal. Daniel Morman, a Florida attorney, writes that the new bankruptcy law creditors will be able to use involuntary bankruptcy to strip homestead protection from people who move to Florida and buy expensive homes to protect themselves from creditors. One issue addressed in the article is whether a wealthy debtor forced into bankruptcy can save his homestead if his case is converted to Chapter 13 by virtue of “the means test.” under the new law. In Chapter 13 the debtor would have to pay part of his debts over time. Mr. Morman states that the means test only applies to voluntary Chapter 7 petitions. Therefore, means testing will not stop creditors from using involuntary petitions to force a Chapter 7 liquidation of homestead properties.

I have written previously on this blog about involuntary petitions under the new bankruptcy law. There are many issues pertaining to involuntary bankruptcy which will have to clarified through judicial decisions. This article shows that bankruptcy attorneys are starting to pay attention to the importance of this issue.

Mr. Morman also raises an interesting question about the “means test” in a footnote: can debtors wanted to file Chapter 7, but who would otherwise fail the “means test”, “enlist the help of friendly creditors to file an involuntary petition on his behalf to accomplish the trick.” It would be unusual for institutional lenders to cooperate with a debtor in a typical consumer debt bankruptcy. This scenario is more likely for debtors dealing with business debt. However, a debtor whose debts are primarily business related are exempt from means testing anyway. This is, however, another interesting question raised by this article.

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

Involuntary Bankruptcy Under New Bankruptcy Law

Many people who have recently moved to Florida and purchased homestead properties to protect their wealth against creditors in other states are concerned that after the effective date of the new bankruptcy law creditors may force them into involuntary bankruptcy. An involuntary bankruptcy would stip away homestead protection from anyone who has moved to Florida and purchased their homestead within the prior 40 months.

At a recent national conference of bankruptcy attorneys I asked the director of the lawyer’s organization about increased risks of involuntary bankruptcy under the new bankruptcy law. Under his interpretation of the new law, the only people who could be debtors are those individuals who prior to attended a debt management course from an approved provider. Debtors who want to avoid bankruptcy would not take the approved course and they would thereby disqualify themselves from either voluntary or involuntary bankruptcy.

This past week the government issued proposed changes in the official bankruptcy rules to adapt to the new bankruptcy law. The proposed rules state that following an order approving a petition for involuntary bankruptcy the involuntary debtor had to file within 15 days a certificate of attendance at a debt management course. The rules contemplate that a person can be ordered by the bankruptcy court to get debt management education after, not before, he is adjudicated bankruptcy as a result of an involuntary petition. Whereas a voluntary bankruptcy debtor who does not file a certificate of attendance is subject to dismissal of his case, the rules do not specify penalties for failure to attend debt management as a result of an involuntary petition.

We do not know if courts will find that the debt management education requirement of the new law is an obstacle to involuntary petitions. It appears that proposed bankruptcy rules assume that mandatory debt management education is not inconsistent with involuntary bankruptcy.

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