Florida Asset Protection Blog

Court Challenges Exemption of Inherited IRAs

Most people, including myself, understood that all IRAs were exempt from creditors outside of bankruptcy and were exempt from the bankruptcy estate for debtors who filed bankruptcy. I received an email from attorney Tye Klooster about an Illinois bankruptcy case which holds that some IRAs are not exempt. If followed in Florida courts this ruling would diminish IRA protection for Florida residents.

Illinois, like Florida, has state statutes which exempt IRAs from creditor collection process. The Illinois statute and the Florida statute protect IRAs that are “exempt from taxation” under Section 408 of the Internal Revenue Code. This Illinois bankruptcy judge said that IRAs which a beneficiary inherits after the death of the owner are not exempt from taxation because the inherited beneficiary is not able to make tax deferred contributions to the IRA and cannot roll over the IRA tax free to a subsequent beneficiary. The judge concluded that inherited IRAs are not within the class of IRAs protected by the Illinois statute or the bankruptcy law.

If this reasoning is followed by Florida courts it could significantly impact asset protection planning for Florida residents in or out of bankruptcy.

The case is In re Taylor, decided May 9, 2006, in the central district of Illinois. Bankruptcy Case No. 05-93559

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

New Respect For Financial Products

I never stop learning about asset protection; I am always looking for new and better ways to protect people’s assets. This week I attended a meeting of a small number of nationally recognized financial professionals and tax attorneys as a guest of one of the member firms. The majority of attendees were nationally recognized financial planners who were top producers; the professionals at this conference service exclusively the wealthy and very wealthy.

At this conference I learned about several advanced level financial products that can be great asset protection tools. I have found that many asset protection clients reject financial protection tools because these tools are primarily insurance based. I had usually agreed with my clients that they should be suspect of insurance and annuity programs because someone was making a commission.

I have changed my mind. The cutting edge financial products include some very effective asset protection solutions. For instance, in many cases pledging non-exempt assets to finance premium payments can protect equity in these assets from creditors and also provide a good investment. To the extent a debtor client can show a credible financial benefit, premium financing should defeat fraudulent conveyance attacks.

Legal tools may not always be the exclusive asset protection solution. I came away from this meeting with the lesson that I and my future asset protection clients need to work more closely with sophisticated and experienced financial professionals. Don’t worry that someone may make a commission for providing effective solutions. Worry more about protecting the rest of your money from your enemies.

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

Homestead: Equitable Lien and Loss of Bankruptcy Discharge

I recently read a case issued by the federal Court of Appeals which illustrated again the different treatment of homestead protection under Florida state law and in bankruptcy law. In this case a debtor obtained a money award through the settlement of her personal injury lawsuit to recover for personal injuries sustained in an accident. She never took possession of her share of the award. Instead, she directed her personal injury attorney to pay her award directly to the bank that held a mortgage on her homestead property. During the personal injury suit the debtor had been sued by American Express for her non-payment of credit card debt. The debtor stated that she had the personal injury award paid directly to her homestead mortgage in order to protect the award from American Express by virtue of Florida’s homestead protection laws.

A few months later the debtor filed bankruptcy. The bankruptcy trustee sought to put an equitable lien on her home. Under Florida law, paying extra money to reduce a mortgage, even if done to protect the money from current creditors, cannot be undone or reversed with one exception. If the money was invested in the homestead to protect it from creditors was the result of fraud or other egregious circumstances courts can give a creditor an equitable lien on the homestead for the amount of the creditor’s debt. This bankruptcy trustee argued that what this debtor did with her personal injury proceeds was either fraudulent or egregious and warranted the imposition of an equitable lien on the homestead.

There are separate rules in bankruptcy applicable to this transaction. In bankruptcy, if a debtor converts money to a homestead or other exempt asset within a year or two of filing bankruptcy in an effort to defraud creditors the bankruptcy court can deny the debtor its discharge of unsecured debts pursuant to Section 727 of the U.S. Bankruptcy Code.

The appellate court issued a split decision. The court said that the debtors assignment of her personal injury settlement to pay down her homestead mortgage did not warrant an equitable lien under Florida law. The money was not obtained by the debtor’s fraud or wrongdoing, and even if she intended to protect the money from creditors by using her homestead protection, her actions were not egregious. The court implicitly distinguishes pay down of a mortgage which may be a fraudulent conversion from actual common law fraud which is egregious and could warrant invasion of homestead rights.

In the bankruptcy case, the court said that the conversion of funds into the homestead did run afoul of Section 727 of the Code. Therefore, the court did deny this debtor its bankruptcy discharge of unsecured debts. In the end, the debtor kept the homestead free and clear of any liens, but the debtor got no relief from unsecured debt in bankruptcy.

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

Continuing Writs of Garnishment in Florida

Occasionally, I get questions from creditors trying to collect judgments in Florida. Some of the questions are relevant to asset protection planning. Here’s one. An out of state creditor had a judgment against a Florida resident who owned rental real property in Florida. The creditor wanted to see if he could garnish the tenants’ rent payments. The creditor wanted to know if he could get a continuing writ of garnishment against the tenants so that each month the tenants would sent their rent payment to the creditor instead of their debtor/landlord.

Florida law permits continuing garnishment of wages. Creditors cannot get continuing garnishments of any other money such as rents, accounts receivable, or promissory notes. Other than wages, a creditor is only entitled to garnish what money is owed to the debtor at the time of the garnishment. Future receipts cannot be garnished (except wages). In this case, the creditor’s garnishment of the tenants will only attach to rents currently owed to the landlord. Future rents must be paid to the landlord unless the creditor serves a new garnishment when the future rents become due. In theory, the creditor would have go serve new garnishments on the first of each month to get that month’s rents.

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

Court Stops Sale of Florida Homestead To Enforce Judgment

I always tell people that if a judge wants to “get you” they will usually find a way- especially the federal judges. One of my clients was sued in federal district court in another state up north. The client was already a resident of Florida. The judge ruled against him and gave the other party a money judgment. Knowing the client, now the judgment debtor, had recently purchased an expensive condominium in Florida as his main asset, the judge issued an injunction to stop the debtor from selling the condominium. The judge rejected imposition of a constructive trust over the condominium because, among other reasons, he probably did not have jurisdiction over Florida property and because he may have questioned the court’s ability to impose a remedy over a Florida homestead protection. What the court did, however, is issue an injunction against the client/debtor personally to stop him from taking any action to sell or transfer the condominium

While the federal court in another state may not have jurisdiction over the homestead property, the court had acquired jurisdiction over the person who owned the homestead. If this were not a federal court the debtor may, as a practical matter, ignore the injunction by a judge in a state court outside of Florida. Selling the condominium would be an act of contempt. A court in a state outside of Florida may be unable to enforce its contempt order in Florida. Flouting a federal court’s order is more risky and is not advisable even when the federal court is outside of Florida. While I am not knowledgeable about federal litigation I suspect a foreign federal court could more easily enforce contempt sanctions in other states including sanctions for violating contempt orders affected Florida homestead. In any event, I advised the client to comply with the injunction.

Although a court cannot force the sale of a Florida homestead the judicial system has other remedies to diminish ownership rights in homestead. This case shows that a court can fashion creative remedies to pressure Florida residents to pay civil judgments even when the debtor has sheltered most of his money in a Florida homestead.

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

Interesting Fraudulent Transfer Question

Consider a man and his wife who moves from Georgia to Florida and purchase a homestead for $100,000 cash. Title to the homestead is in the name of the husband only. After he and his wife reside in the new home for a few months, the man gets an equity line second mortgage. He uses $50,000 of loan proceeds to purchase an investment property title to which is taken in the wife’s name only. A year later, the man encounters severe financial difficulty and files chapter 7 bankruptcy. Because he has not lived in Florida for two years prior to filing he is not eligible for Florida bankruptcy exemptions and must file with Georgia exemptions even though he is a Florida resident. Georgia has a relatively small homestead exemption which I’ll assume is $10,000. (exact amount is not relevant ). Therefore, only $10,000 of his homestead is an exempt asset in bankruptcy. The issue is whether the equity line loan used to purchase the $50,000 property for his wife is a fraudulent conveyance of $40,000 subject to attack in the bankruptcy

I don’t know of any judicial decisions on point with this situation.. Whether a transfer is a reversible fraudulent transfer depends on the debtor’s intent. Facts and circumstances are evidence of intent, but there is not formula of fact to infer intent in every case; each case must be examined under its own facts.

Looking at the transaction solely within the bankruptcy context, there has been a conveyance to the wife of non-exempt equity to of $40,000 within a short time prior to bankruptcy. Yet, at the time the transfer occurred the man was under Florida’s unlimited homestead exemption law, and at that time his transfer of money to his wife was the transfer of proceeds from an exempt homestead. This case presents the question of whether a transfer of exempt property to another person can subsequently be reversed as a fraudulent conveyance if the transferor files bankruptcy and where the same asset transferred is not exempt under the bankruptcy law.

A bankruptcy trustee or bankruptcy judge could rule that the transfer of an asset not exempt in the bankruptcy context may be a fraudulent transfer. In my opinion, subject to finding a contrary decision, is that the transfer is not a fraudulent transfer because at the time of the transfer the asset was exempt homestead. The transferor/debtor could not have intended to make a transfer to avoid creditors if he did not then anticipate bankruptcy and knew that the asset would not be exempt in bankruptcy.

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

Equity Reduction Plan

I received an email inquiry about whether “equity reduction plans” are an effective asset protection technique. The mail described these plans as a version of equity stripping . In the equity reduction plan someone puts a friendly mortgage or lien on the debtor’s property but no money actually changes hand. I inferred that the tool is supposed to place a priority lien on the property to a friendly creditor without having to actually find or obtain enough cash to fund a lien large enough to cover most of the property equity.

I never heard of an equity reduction plan. I don’t think the plan as described will protect property because the mortgage/lien is essentially bogus. The conveyance of a lien or mortgage could be attacked as a fraudulent conveyance of an interest in property without actual consideration. . A relatively unknown Florida statute, Section 726.201 pertains to fraudulent loans that may apply to the equity reduction plan.

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