Florida Asset Protection Blog

When Annuities Provide Better Asset Protection Than Homestead

The general rule is that when a debtor transfers or converts an exempt asset to another person, or to another form, there is no fraudulent transfer or conversion. If the transfer or conversion is reversed the property would revert to its initial exemption, and there is not harm to creditors from the transfer or conversion of an asset the creditors could not reach in the first place.

People need to be very careful, nevertheless, how they transfer an exempt asset if they foresee future legal problems. For example, Florida statutes protect the proceeds of an annuity. If a debtor sells an annuity and deposits the proceeds in a separate bank account the proceeds remain protected after the annuity sale. A transfer of the annuity proceeds from the bank account should not be a fraudulent transfer.

Proceeds from the sale or refinancing of homestead are treated differently. Pursuant to a Supreme Court decision proceeds from the sale of a homestead are protected only if they are intended to be reinvested in a new homestead within a reasonable time. Otherwise, once homestead equity is converted to cash the cash may be vulnerable to creditors even though the case represents homestead equity.

Consider for example a married couple whose homestead is owned in the name of the wife only where the wife takes out a home equity line of credit. If the wife draws a cash advance on the line of credit and deposits the proceeds in her bank account the proceeds become vulnerable to the wife’s creditors. If the wife transfers the line of credit proceeds to her husband the transfer could be attacked as a fraudulent conveyance. If the wife buys an asset with the homestead loan proceeds and titles the new asset in the husband’s name the transaction could be attacked as a fraudulent conveyance. On the other hand, the wife would defend a fraudulent conveyance action by arguing that the loan proceeds were put in her separate checking account only as a commercial necessity for the transfer of exempt homestead interest to her spouse. In this regard only, annuities are a better asset protection tool than homestead because of the express protection of annuity proceeds.

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

Homestead Ownership in Partnership

The Third District Court of Appeal held this month in the case of Buchman v. Canard that a debtor could not claim homestead protection of his residence which was titled in the name of a partnership. The court ruled that partnership properties are not entitled to the homestead exemption even if a partner resides in the property. Previous posts on this blog have expressed the importance of owning homestead properties in the name of the natural person (individual) who lives in the property.

Where Annuity May Not Be Fully Protected

The proceeds from an annuity are exempt from creditors under the Florida statutes. The statute protects from legal process the annuity interest of the beneficiary of the annuity. In almost all cases, the same individual purchases and owns the annuity and makes himself the annuity’s primary beneficiary. The statute protects from creditors all of the beneficiary’s interest in the annuity.

A different result may occur when the owner and the beneficiary are different individuals. For instance, suppose an individual purchases an annuity, makes himself owner and annuitant, and names another family member as primary beneficiary. The beneficiary’s interest is protected from the beneficiary’s creditors. Its not clear that the interest of the purchaser and owner is protected from the owner’s creditors. An attorney called me this past week to discuss a bankruptcy proceeding where the debtor purchased and owned an annuity that named another family member as primary beneficiary. The question was whether the bankruptcy trustee could assert an interest in the annuity.

I think the trustee, or a creditor outside of bankruptcy, could attach the debtor’s interest in the annuity under certain circumstances. The owner of an annuity has rights and powers, and where the annuity contract so provides, those rights usually include the right to change the beneficiary and the right to sell the annuity contract. If the annuity contract gives the owner the power to change beneficiaries the bankruptcy trustee could assume the debtor/owner’s rights under the contract and name himself, the trustee, as beneficiary. Thereafter, the trustee could sell the annuity and the proceeds would be paid to the trustee as the replacement beneficiary. An annuity contract could make the initial appointment of the beneficiary’s irrevocable, and in such case, neither the owner/debtor or the bankruptcy trustee or creditors could gain any financial recovery from the annuity as all proceeds would be paid to the initial beneficiary.

This question illustrates that Florida’s statutory protections must be read precisely, and asset protection must be designed carefully.

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

How Should Married People Own Property?

A few married people who are concerned about asset protection have asked whether it is better to hold property jointly as tenants by entireties or title property in the name of the one spouse least likely to be sued. Both forms of ownership are protected from creditors of the spouse most likely to become a judgment debtor. There are different consequences in the event the non-debtor spouse predeceases.

Upon the death of the non-debtor spouse the property owned tenants by entireties vest in the name of the surviving spouse where the property would be vulnerable to the surviving spouse’s individual creditors. The title conveyance is automatic and no probate is necessary. Tenants by entireties ownership is easy and inexpensive to establish without the assistance of an attorney.

If the non-debtor spouse owns property in their own name, rather than jointly with the debtor spouse, upon the death of the non-debtor spouse probate will likely be necessary. However, probate can be avoided if the non-debtor spouse leaves the property in trust for the debtor spouse and other heirs. The trust agreement could include “spendthrift provisions” which protects the property from the creditors of the surviving spouse and other heirs. Establishing such a trust requires the assistance of an estate planning attorney.

If either spouse is unlikely be sued then titling non-exempt property in their individual name is probably better asset protection provided there is also an effective estate plan. This issue illustrates how asset protection should be designed in conjunction with estate planning.

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

Asset Protection And Estate Planning Interplay

Effective asset protection sometimes contradicts proper estate planning. In Florida and some other states property owned by married couples as tenants by entireties is exempt from creditors with judgments against either spouse individually as long as they are married. An asset protection client could have easily and effectively protected property from future legal problems by transferring his property to joint ownership with his spouse. His problem was that his current spouse was his second marriage, and he had children by his first marriage. His estate plan was to ensure his children from a prior marriage ultimately received a substantial portion of his wealth. I pointed out that if he owned property tenants by entireties with his current wife, in the event he predeceased his wife all jointly owned property would be owned by his surviving spouse regardless of what he put in his will or living trust. At that point, his surviving spouse could leave the property to whomever she wished. She would not be bound by the testamentary intent of the deceased spouse. This person decided not to utilize tenants by entireties because he would lose control over the ultimate disposition of his property and could not protect the interests of his children. His asset protection plan became more complex and expensive as a result.

This was another example that asset protection is always part of overall estate planning. Just as an ill conceived asset protection plan, in this case tenancy by entireties, risks upsetting an important estate planning goal, the opposite is also possible. An estate plan which separates marital property to possible reduce estate tax exposure can take away otherwise desirable protections afforded joint ownership. An asset protection planner should know the client’s estate planning objectives.

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

New Entities: Same Effect

A prospective client asked me about the following asset protection plan. The wanted to establish an entity known as “an Independent Pure Business Trust.” The beneficiary of the trust would be an offshore trust. The offshore trust would establish a Swiss bank account. The client could borrow money from the Swiss account to pay living expenses. The loans would be secured by something called a “common law lien” on the caller’s property.

I told the client I would not take his money to investigate or set up such an asset protection plan, because I saw no legal benefit. I never heard of a “common law lien” (maybe there is such a thing somewhere), and the only pure business trusts I am familiar with are a type “abusive trusts” used to evade income tax. I authored a post a few days ago about complex asset protection plans usually fail. The same comment applies to asset protection plans that use novel legal terms like independent pure trust that few lawyers would recognize or endorse.

Creating an effective asset protection plan does not involve generating new names and varieties of legal entities. The fancy names will neither confuse nor deter your creditors. Stick with plans that use common legal entities and employ these common entities properly and openly in your personal planning

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

Another Offshore Protection Plan Fails

This is important. I have written previously on this blog that complicated offshore trust planning is overrated because the more elaborate plans are the most difficult properly to design and execute. A few years ago a creditor retained me to help his collection attorney pierce a very complex offshore asset protection plan. The creditor was owed close to one million dollars, and the debtor’s asset protection entities had much more than one million dollars of assets. The asset protection plan was among the most complex and potentially effective protection plans I have seen. The debtor had placed real property in domestic limited liability companies whose share were owned by family limited partnership whose partners were offshore trusts with foreign trustees.

The collection attorney and myself analyzed the complicated plan in search of some rights or control retained by the debtor. We focused on two provision of the plan. First, the documents required the offshore trustees and LLC managers to distribute all income earned to the debtor who was the ultimate beneficiary of the entities. Second, the debtor retained the right to remove and replace trustees. Ultimately, a Florida court said that our client, the creditor, could levy upon both of the debtor’s retained powers, and it ordered that all income generated by assets owned by the asset protection entities be paid to the creditor. This order cut off the debtor’s source of income, and because the debtor’s wealth generated substantial income, the order produced a quick and favorable settlement for the creditor.

The story is another example of the most common flaw in complex offshore asset protection- debtors do not want to relinquish control over large amounts of assets and they often need income from the assets for their support. This creditor spent large amounts of legal fees creating what he thought was an offshore fortress. The fortress looked confusing and impenetrable at first, but when its details were exposed, the fortress was built upon a poor foundation. The foundation did not include the debtor’s willingness to truly part with enjoyment and control.

A debtor’s ability to trust an unrelated party to control his wealth, and his financial ability to support himself with exempt assets held outside the asset protection plan is the only foundation which will support a complicated asset protection plan. If the debtor is willing to relinquish control and enjoyment a much simpler, much less expensive asset protection design will always produce superior protection.

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

Taking Your Florida Exemptions to Georgia

I received an interesting email from a guy in Georgia who is a reader of the blog. The reader says:

"Your Florida Asset Protection Blog has certainly been interesting reading. I bet I have a situation you have not heard of yet! Here in Georgia there is a new statute which provides that, in any attempt to execute a domesticated judgment against a Georgia resident, the judgment debtor has the same protections as a resident of the state from which the judgment was issued. (see O.C.G.A. 44-13-120)."

If this accurate summarizes the new Georgia law, Florida residents could take their exemptions, including homestead protection, with them if they move north. The reader says Georgia homestead protection is limited to $10,000. After being sued in Florida, a person who owns a Florida homestead could sell the house and buy a new residence in Georgia and enjoy unlimited homestead protection. Or, a Georgia resident who sees a possible lawsuit on the horizon can move to Florida, buy a homestead, and make the creditor sue him in Florida courts. The debtor could let the creditor get a Florida judgment. Then, some time in the future after establishing Florida residency, the debtor could change his mind and return to his original home with his new Florida exemptions.

There are several issues which Georgia courts will hopefully clarify. For instance, does the debtor have to own a homestead in Florida or own property tenants by the entireties in Florida in order to transfer the same exemption over the same property? Or, can a Floridian with no homestead who gets a judgment against him in a Florida court then move to Georgia and buy his initial homestead in Georgia and still be protected. Would tenants by entireties protection apply if the Florida debtor moves to Georgia while single and marries in Georgia.

In any event, I am not aware of any other law of this kind in any state. If any reader has insights or opinions about the new Georgia statute please let me know.