Florida Asset Protection Blog

Small Details Can Sink Asset Protection Planning

Its very important to pay attention to all items on financial account applications, bank account agreements, bills of sale, vehicle titles, and all other transfer documents. For instance, one of my debtor bankruptcy clients married a man who is a commercial fisherman. The husband bought a commercial fishing vessel for all cash using money he earned from his profession and proceeds from the sale of an exempt piece of real property owned jointly with his spouse, my client. Commercial vessels have to be registered and titled by the U.S. government, and an application for new title is typically submitted by private title agencies that deal in these type of commercial boats. My client’s husband hired such a private title company which sent a form to the boats prior owner for his signature in order to initiate title transfer. The form included several boxes to be checked, each indicating a different form of joint ownership. One of the boxes was for “tenants by entireties”; another for joint ownership with survivorship; and another for community property. The standard language on the form stated that if none of the boxes were checked it any joint ownership as tenants in common would be presumed. If the boat were owned tenants in common the bankruptcy estate could claim my client’s undivided interest amounting to 50% of the fishing boat.

The seller filled out the form naming my client and her husband as joint owners with rights of survivorship, and the seller signed the form. Neither my client nor her husband signed the application for title. However, the seller did not check any of the boxes. My client claimed the fishing boat was exempt as a tenants by entireties asset because the title application listed here and her husband as joint owners. Yet, the story does not end here.

The bankruptcy trustee now argues that because no boxes were checked the boat is owned tenants in common by virtue of the standard form language even though my client did not fill out or sign the form. As a result my client has to either incur significant legal fees to contest the trustee’s objection to the tenants by entireties exemption or pay the trustee substantial amount of money to settle the disagreement. An innocent oversight in a transfer document will cost my client significant amounts of money regardless of her decision to fight or settle.

Perhaps the lesson is that in order to protect assets using Florida exemptions such as tenants by entireties debtors must pay very careful attention to all details of ownership. Laymen typically ignore small print and boxes on standard forms because they don’t appear to be significant. What may not appear meaningful to a layman can have legal significance in asset protection planning. A small legal error opens the door for creditors to challenge exemptions, and even if the creditor’s position is wrong or extreme, the debtor will at least incur legal costs to defend their exemption, and there is always a risk that a result-oriented judge will rule against the debtor. When you implement your asset protection plan make sure you have the assistance of someone with experience and knowledge.

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

Nevada Asset Protection Trusts

I recently had dinner with a well-known and extremely bright asset protection attorney from south Florida. Dinner conversation touched on the topic of domestic asset protection trusts. Domestic asset protection trusts (DAPT) are self-settled trust where the debtor is both settlor/trustmaker and the primary beneficiary. Domestic asset protection trusts set up in states which have enacted statutes to protect self-settled trust from attack by creditors of the settlor. Florida has no DAPT statute, and Florida courts have provided no asset protection to any self-settled trust.

I had never been a fan of DAPT planning because of a concern that Florida courts would not extend protection to a Florida debtor who was the beneficiary of a DAPT in favored states. However, my colleagues persuaded me to reconsider the benefits of a DAPT, especially a Nevada based DAPT. Nevada law provides may unique benefits to its asset protecton trusts. For example, the statute of limitations on fraudulent conveyance suits against transfers to a Nevada DAPT is only two years or six months after the conveyance is discovered. Nevada law specifically allows to debtor/settlor to have limited trustee powers including the retained power to invest trust assets. Powers to distribute trust property to the settlor/beneficiary is best left to an independent co-trustee. A Nevada trust, being domestic, provides greater sense of comfort and control than trust formed and operated in a foreign country.

No Florida court has yet ruled on the asset protection afforded by a Nevada DAPT, but my dinner colleague convinced me that in theory these trusts should be respected by Florida law. In any event, a Nevada DAPT is an asset protection alternative worth considering in complex asset protection situations.

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

Tenancy By Entireties Protection For Unmarried Couple

A Florida debtor emailed me a question about tenancy by entireties protection. He said that a collection agency was threatening wage garnishment and a judgment for old credit card debt. This debtor he lives with and supports his girlfriend and their three dependant children. He asks whether his joint bank accounts are protected as tenancy by entireties accounts where the debts are his only. I do not think this debtor can invoke tenancy by entireties protection because he is not legally married. The case law is clear that tenancy by entireties applies to lawfully married couples. I do think that this debtor can defeat wage garnishment because his support of his children probably qualifies him as the head of a household. In most situations, Florida statutes prohibit a creditor from garnishing wages and other compensation paid to a Florida resident who is head of household .

Debtor As Both Trust Beneficiary and Trustee

I received an email from Florida attorney Tye Klosster concerning asset protection of a trust established for the benefit of a Florida debtor where the trust agreement names the same debtor/beneficiary as trustee and also includes standard spendthrift protection. Such trust arrangements are often set up by parents’ living trusts for the benefit of their children as part of the parents’ estate planning. Otherwise stated, the question is whether trust beneficiary enjoys protection from standard “spendthrift provisions” where the beneficiary serves as trustee with discretion to make distributions to himself.

I think that the trust beneficiary cannot rely on creditor protection where the trustee also has discretion to make distributions. My reasoning is that even though the trust document states that distributions are discretionary a judge could order the trustee/debtor to distribute trust assets where they could be subject of creditor seizure. Alternatively, the creditor could argue the trustee’s discretionary power is an asset subject to the creditor’s levy. The creditor could take over the power and distribute all trust property to the debtor/beneficiary where the property would be subject to the creditor.

Mr. Klooster referred me to a Florida bankruptcy case which he says held that Florida trusts cannot enjoy spendthrift protection if the same debtor is trustee and beneficiary. (In re Bottom, 176 BR 950). If asked , most parents who want to leave assets to children in trust would want the same assets protected from their childrens’ creditors. One alternative is for the parents to name an independent trustee so that the beneficiary has no powers to effect distributions. I find that many parents want to give their children at least limited control over their trust property and to that end my trust documents require the beneficiary to select their choice of an independent co-trustee over their trust share. I almost always provide that no trustee can make any distribution for the benefit of a beneficiary’s creditors or former spouses. I believe the combination of these provisions provides reasonable asset protection with sufficient input from the beneficiary for estate planning. But, I may be wrong; different lawyers will have different techniques.

Mr. Klooster pointed out in a follow up email that this issue is a good example of how asset protection goals often conflict with estate planning goals. He states correctly that from an estate planning and tax standpoint there is no harm in having a beneficiary serve as sole trustee so long as discretionary distributions are limited for health, education, maintenance, and support.

This is an interesting issue and comments would be most

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

Is Debtor Supporting Same-Sex Partner Head of Household For Wage Exemption ?

Florida statutes exempt from creditors wages, salary, and other compensation for services earned by the head of household. A head of household is the person who provides more than 50% of the support for a dependent. Florida courts have held that the “dependent” does not have to be a dependent for income tax purposes and does not have to reside in the household. There must be a legal or strong moral obligation to provide economic support.

A email asked if a debtor could be head of household if the debtor lives with and financially supports a same sex partner. Although there arguably is a moral obligation of support in this situation, in my opinion, that obligation is too far removed from the intent of the statute. Debtors who asserted head of household based on moral support obligations have done so in the context of a traditional family. For instance, a debtor may have a moral support obligation toward an adult child residing in a separate dwelling or toward an elderly parent. Even though a debtor may feel morally obligated to support a live in boyfriend or girlfriend, I do not think that obligation to a non-family member would be strong enough for the debtor to be entitled to wage exemption as the head of a household.

Can Homestead Protection Be Waived?

A Florida resident entered into a commercial contract which contract included a waiver of homestead rights. The same Florida resident was subsequently by the other party to the contract, and a money judgment was entered against the Florida resident and in favor of the other party. The other party, now a judgment debtor, seeks to enforce the money judgment by forcing the sale of the debtor’s homestead arguing that the debtor had waived homestead protection when he signed the agreement. The issue presented to the appellate court in Florida was whether Florida’s homestead protection can be waived in a commercial contract.

The court found that the waiver of homestead was enforceable by the creditor, and that the creditor could levy on the homestead. The court held that,

“Applying this same construct to this case, we see no reason why an owner of homestead property should not be able to waive this constitutional right if he so desires. As the Florida Supreme Court stated in Caggiano, 605 So.2d at 59,“the homestead exemption was intended simply to guarantee that the homestead would be preserved against any involuntary divestiture by the courts” See also Havoco, 790 So.2d at 1022 (“The homestead guarantee uses broad language protecting the homestead from involuntary divestiture”). Absent a plain and unambiguous statement in the Florida Constitution to the contrary, we decline to imply a prohibition against a voluntary divestiture of one's constitutional right to homestead protection."

The court said that waiving of homestead protection in a commercial agreement is not significantly different from pledging homestead to secure a mortgage. I wonder if sophisticated commercial entities may insert homestead waiver provisions in future contracts.

DeMayo v. Chames
Fla.App. 3 Dist.,2005

posted by Jonathan Alper, asset protection and estate planning attorney, Orlando, Florida

Homestead Planning Tip

There is an interesting asset protection planning idea in article published in ABA Health eSource and co-authored by attorneys Alan Glassman of Clearwater, Florida and Justin Pikramenos of Stetson University in Deland, Florida. The article addresses the hypothetical situation where a debtor jointly owns with his spouse an expensive homestead property and where the debtor also has substantial amount of non-exempt assets titled in his name individually. For example, assume that the jointly owned homestead is worth $1,000,000 and the debtor has $500,000 of individually owned assets. Glassman and Pkramenos suggest that the debtor spouse buy his non-debtor’s spouse ½ interest in the homestead property for $500,000 and that payment be made with the debtor’s $500,000 of non-exempt assets. The debtor spouse would end up with 100% ownership of the exempt homestead and no non-exempt assets.

The transaction would be relatively difficult to challenge as a fraudulent conveyance because the debtor spouse will have transferred non-exempt assets to the non-debtor spouse for reasonable consideration, that is, one-half of a homestead valued roughly equal to the amount of non-exempt assets transferred to the non-debtor spouse. The general rule is that a conveyance for adequate consideration can be reversed only if the creditor can prove the transfer was made with actual intend to hinder or delay the creditor’s claim. The fraudulent transfer attack is best defended if the debtor can demonstrate a viable estate planning or tax benefit. Even if the debtor loses the fraudulent conveyance argument, the situation is no worse than it was at the outset of the plan. The most likely outcome in this hypothetical would be some settlement with the creditor on terms more favorable than if the debtor had not purchased the non-debtor’s spouse’s homestead interest.

Thanks to Alan and Justin for the idea.

posted by Jonathan Alper, asset protection and estate planning attorney, Orlando, Florida

Protection of Inheritance

A person with creditor problems or a money judgment against himself may feel “lucky” if a relative dies and leaves him an inheritance. Yet, the inheritance is an asset as soon as it is determined by a court, or pursuant to a living trust, that the debtor has a beneficial interest. If money is distributed from the decedent to the beneficiary the money is even more accessible to creditors. If the debtor accepts the inheritance and then transfers the money to another non-debtor family member or to a protected asset, such as an annuity, that transfer will be attacked as a fraudulent conveyance subject to reversal. The best situation would be if the decedent had made a bequest to his heirs or beneficiaries in a trust for their benefit rather than outright distributions, assuming the trust document had proper spendthrift language to provide creditor insulation. Unfortunately, the decedent himself usually does not have asset protection concerns at the time the testamentary will or trust is created, and protection of the inheritance from the creditors of one or more of his heirs is not an important estate planning motive.

One of the most important tools of asset protection planning is involving parents or grandparents in your asset protection plan by encouraging them to leave your inheritance in protective trust. The heir with asset protection concerns must take responsibility for this part of family planning. For the heir or beneficiary, a bequest in trust with liberal distribution instructions provides nearly unrestricted use of the inheritance yet protects inheritances from judgments. If you are a judgment debtor who is faced with the prospect of an inheritance in the form of an outright bequest you may consider a “disclaimer” whereby you waive your right to the inheritance, and the inheritance automatically passes to you lineal decedents. In such case, a creditor could argue that the disclaimer was a form of fraudulent conveyance. A disclaimer would be easier to defend than a transfer of inherited money after the heir or beneficiary takes possession of an outright bequest. I am unaware of any court decisions reversing a disclaimer as a fraudulent conveyance.

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