Florida Asset Protection Blog

Involuntary Bankruptcy Increasing: Word On The Street

The word on the street is that involuntary bankruptcy petitions are on the rise- as expected. Florida residents have unlimited homestead protections outside of bankruptcy, but once they are in bankruptcy court the same debtor’s homestead protections are limited by the new bankruptcy law. Where several creditors have substantial claims against a debtor it is usually to the creditors’ advantage to have the debtor in bankruptcy.

As I was leaving the bankruptcy court building today I had a brief conversation on the street corner with one of the most experienced bankruptcy trustees in our local trustee panel. He said that in the afternoon he was involved in hearing on two separate involuntary bankruptcy petitions. In both cases, the debtor subject of the involuntary bankruptcy effort had set up an offshore trust in an attempt to shield assets from creditors. Offshore planning does not work as well in bankruptcy as it does in state court proceedings. The trustee said that he was aware of a significant increase in involuntary bankruptcy petitions in recent months. Involuntary bankruptcy was rare under the old bankruptcy law.

It may take time before involuntary bankruptcies under the new bankruptcy law work their way through the appeals process to become case law decisions. But, it appears at least to this one trustee that there is a trend toward creditors using the new bankruptcy law to attack creditors with involuntary bankruptcy. At least, that’s the word today on the street outside bankruptcy court.

Lending Credit Can Cause Creditor Problems

Sunday’s Washington Post included an article by syndicated columnist Michelle Singletary in which I was quoted as an expert on bankruptcy law and consequences of bankruptcy. http://www.washingtonpost.com/wp-dyn/content/article/2006/07/22/AR2006072200106.html?sub=new. I post the article primarily because it address a frequent and serious financial planning mistake that can lead to ruined credit and bankruptcy. The article warns about risks you take when you let someone else become an authorized user on your credit card. The most frequent problems I see are parents who lend their credit card, or their signature, to children to help the children buy something a lower interest rates. If the child fails financially the well-intentioned parents bear the financial burden, often leading to their own bankruptcy. You should read the article and pay attention to what Ms. Singletary’s grandmother, “Big Mama” , had to say about this subject.

Protection of Hurricane Savings Accounts

One of my clients last week reminded me of an infrequently mentioned financial asset protection tool: the “hurricane account.” Hurricane accounts were established to encourage people to save money to cover uninsured losses from Florida hurricanes. The statute provides that a property owner can set up a segregated financial account to cover insurance deductibles and other uninsured risks of windstorm and flood losses. Deposits into the account are protected up to twice the amount of the insurance deductible. The statute also protects income from the account.

The statue is limited to hurricane insurance for homestead property. Also, the statute’s effectiveness is contingent on the federal government providing tax-exempt status to account’s created to cover an insurance deductible or other uninsured hurricane risk. The statute is not limited to bank accounts, and the contents of accounts are not limited to cash. The statute protects money and “assets” in hurricane accounts. Possibly, a securities account might qualify. I observe that only Florida residents who own a Florida homestead may qualify, the statute does not state that the qualifying insurance is limited to insurance for the homestead. The statute states that accounts qualify if the insurance is for residential property, but not just the homestead residence. One could argue that any homestead owner could protect accounts for other investment residiential property, although I suspect that was not the legislative intent. I am not aware of any court decisions interpreting this statute.

This statute provides some interesting asset protection planning opportunities for owners of residences with high deductible hurricane riders. The statute reference is F.S. 222.22(4)(a).

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

Income Tax Savings Offshore?

Many businessmen who are interested in asset protection also are concerned about reducing income taxes. Some people mistakenly believe that asset protection involves tax reduction by utilization of offshore entities. Asset protection and tax planning are for the most part separate issues. When asked about income tax savings in offshore planning I quickly explain to people that I am not experienced in income tax law and cannot offer competent tax planning advice. Last week, I had lunch with a local tax attorney who gave me interesting information about how some of his wealthy business clients have substantially reduced their income tax.

The tax attorney told me that these people have greatly reduced their tax bills by establishing residency and their business locale in Puerto Rico. Apparently, one can qualify as a permanent resident of Puerto Rico (“PR”) by living on the island for a period of six months. The requirement is not six months each year, but six months residency in any one year. The attorney further explained that if you run your business out of Puerto Rico thereafter there is a way for you to get a huge U.S. income tax credit. He said use the island to host ancillary businesses that can be used to apply the tax credit. One example he gave was a client that set up a Puerto Rican equipment leasing company and had his U.S. based manufacturing company pay tax deductible lease payments to the PR entity which sheltered the income under the PR tax credit law.

Readers who may be more expert in income tax may take issue with my shortened, layman explanation of this income tax planning technique. In the event anyone wants to know more about the PR provisions or other offshore income tax planning send me an email and I will refer you to my attorney friend for more reliable income tax advice.

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

Is Homestead Subject To A Constructive Trust Remedy?

A man is appointed trustee of a trust for the benefit of himself and another, younger beneficiary. The trust agreement provides that the trustee should use the assets for his own benefit only if his other resources are depleted. Nevertheless, at a time when the trustee has significant other financial resources he uses the trust assets to purchase a primary residence in California for himself and his spouse, as joint owners with survivorship. The trustee dies. Title to the home passes to the surviving spouse. The surviving spouse sells the home, moves to Florida, and invests the proceeds in a Florida homestead. The other beneficiary sues to recover proceeds invested in the California house. A California court finds that the trustee wrongfully appopriated trust property in violation of California statutes and his general fiduciary duty, and as remedy, holds that the surviving spouse holds her Florida house in a constructive trust for the surviving beneficiary. Can the beneficiary enforce the California court order in Florida so as to force conveyance of the spouse’s Florida homestead to the California beneficiary?

This is a complicated and interesting question which I have just begun to research. Generally, a California court cannot determine title to Florida property. On the other hand, Florida courts have found that imposition of a constructive trust is not the same as determining title ownership such as the case in a quiet title action. A constructive trust is an equitable remedy to make right what is otherwise inequitable. The other issue is whether a California court, or a Florida court, could impose a constructive trust on a Florida homestead to remedy the deceased’s trustee’s wrongdoing. The Florida Supreme Court has held that a court can place an equitable lien on a homestead to remedy a fraud or other egregious circumstance. However, an equitable lien is similar to , yet different from a constructive trust. A constructive trust calls for the immediate transfer of title back to the complainant, whereas an equitable lien does not give the complainant the right to force a sale or conveyance. The Trustee’s breach of his fiduciary duty is not the same as common law fraud, and there is no case in Florida holding that breach of duty calls for an equitable remedy against homestead property. Also, one Florida case says that a constructive trust cannot be placed on a house unless there was fraud by the beneficiary of the homestead protection, in this case, the innocent surviving spouse.

As of know, I think the Florida homestead would survive absent showing of fraud or other really bad facts in the California case.

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

Wage Account Questions

Two people asked me similar questions today about “wage accounts” The first question was whether you have to have a separate account titled “wage account” to have your salary or commissions protected after they are deposited in a bank account. The answer is no. However, whatever the account is titled it makes the wages easier to defend if only wages are deposited. You could deposit wages in a tenancy by entireties account and still qualify for the protection. The statute that protects wages of the head of household does not require segregating the wages in a distinct account.

A second question was whether there is a monetary limit on the amount of money that remains protected in a wage account for a period of six months. The answer is no. The wage protection statute does not impose a maximum amount of protected wages for people who are head of household.

An interesting question is whether the head of household can transfer money from his wage account to another checking account. Probably no, as long as the other account is also protected from creditors. Suppose a single debtor who supported, for example, a minor child or parent, had a “wage account” and a second account in his own name. If money was transferred from the wage account to the second account a creditor could try to garnish the second account. The debtor would have to argue that both accounts hold only wages. The statute does not limit debtors to a single “wage account.” If the same debtor were married, and the debtor transferred wages to a tenancy by entireties account, the transferred wages would be easier to defend. I believe a creditor could still argue that the transfer of money to the joint account was a fraudulent conveyance to the spouse in order to protect the money beyond the six month period provided by the wage protection statute. I do not know of a case on that issue.

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