Florida Asset Protection Blog

Drafting LLC/LP Agreements to Withstand Bankruptcy

read an interesting and important article in this months Florida Bar Journal about limited partnerships and limited liability companies in bankruptcy. The article was, “Asset protection Proofing Your Limited Partnership or LLC for the Bankruptcy of a Partner or Member”, by Thomas O Wels and Jordi Guso. The LP and LLC have effective asset protection features outside of bankruptcy. If a debtor files bankruptcy, the bankruptcy trustee has greater powers to attack and liquidate the interest of the debtor partner or member, to the detriment of both the bankruptcy debtor and his other business associates. The Bar Journal article cited a bankruptcy decision in the case of In re Ehmann and certain sections of the bankruptcy code which provide powers to the trustees to attach partnerships and LLCs which powers are not available to normal judgment creditors.

The authors suggested several provisions be added to LLC and partnership agreements to help protect the debtor's interests in bankruptcy. The most important changes to the agreements are imposing obligations on members and partners to make future capital calls and to be involved in management. The agreement should state that its intent to be an "executory contract." As a side note, mandating partners' involvement in management does not expose limited partners to general liability given changes in Florida's limited partnership statute.

When drafting an LLC operating agreement of family partnership agreement for asset protection the attorney and client should understand that the asset protection features of these entities are designed to defend against creditors in state court collections as the protective features are provided by Florida statute. The protective features of LLCs and FLPs are not found in federal law and in the bankruptcy code, in particular. As the article points out, special provisions are required to make the LLC and FLP effective in a bankruptcy setting, and even with the suggested provsions, I do not think these tools are nearly as effective once a debtor finds himself in bankruptcy court.

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

Bank Acounts to Avoid Probate: POD vs. ITF accounts

I received an interesting question about the difference for asset protection purposes between bank accounts titled “ITF”, or in trust for, and bank accounts titled “POD”, pay on death. An example of each account title would be as follows: “John ITF Mary” and John POD Mary. Both accounts are set up by John and funded with John’s money. In both cases, when John dies all the money in the accounts passes to Mary outside of any probate of John’s estate. The writer reported that one Florida bank permits only ITF accounts whereas a different Florida bank uses only POD accounts. Does the choice of these two titles make any difference in terms of protecting the money from John’s creditors during his lifetime.

Here's my understanding, although I know of no cases comparing the two types of accounts. . ITF , “in trust for” implies the existence of a trust relationship so that the beneficiary of the trust (Mary) would have equitable ownership in the account funds from the day John funds the account. . Of John opened a POD accoutn, Mary would have no rights or interest in the account during John’s life, and Mary would first acquire an interest upon John’s death. From an asset protection standpoint, John is a trustee over Mary’s money during his life in the case of an ITF account, and John has no equitable ownership in the money which would be vulnerable to his creditors. Creation of the ITF account is an immediate gift in trust to Mary. If John’s POD account John has a life estate in the account and the beneficiary has a remainder interest. During his lifetime John has full access to money in his POD account; Mary’s interest is limited to what is left in the POD account upon John’s death.. Because John can access for his own use money in a POD account during his lifetime I expect that John’s creditors could attack money his POD account as they can get whatever rights John has in the POD account. For that reason, I believe an ITF account provides better asset protection as well as probate avoidance.

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

Homestead Protection of Occupied Apartment Building

I received a couple homestead e-mails this week; one is easy to answer, the other is more interesting. The first question is whether Florida homestead protections can apply to more than one home owned by a Florida resident. No. Homestead by definition is your primary residence. Other real estate in your name which is not your primary residence is not under the definition of homestead. The second question is whether a person who owns an apartment building and lives in one of the apartments can protect the entire building under homestead provisions.

Homestead protects your primary residence and contiguous property up to ½ acre in a city and 160 acres outside of city limits. I assume the apartment building would be on ½ acre of land or less, or that it is outside the city. That does solve the issue. Homestead does not protect commercial or rental property. There are several cases involving duplex buildings owned by one Florida resident where one unit is occupied by the debtor and the other unit is rented. These cases do not agree. Some cases have denied homestead protection to all or at least ½ the equity. I am not familiar with any case law about debtor’s claiming homestead protection for a larger rental structure such as a multi-unit apartment with just one apartment occupied by the debtor as his principal residence. My guess is that courts would deny homestead protection to any more than a portion of the equity proportionate to the debtor’s personal use of the building.

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

WSJ: Nevada Corps Under IRS Scrutiny

I receive many calls people, and often retain new clients, who have previously established Nevada corporations or who ask me if I can help set up a Nevada corporation as part of an asset protection plan. I almost always respond that Nevada corporations are not necessary or beneficial asset protection tools for Florida residents. Nevertheless, many people have been convinced by some other source of the benefits of establishing business through Nevada corporations. There are on the internet many services which market services to help set up business in Nevada. Based on an article in today’s Wall Street Journal, the purported benefits of a Nevada corporation may be tax evasion rather than asset protection.

The December 6, 2006, issue of the Wall Street Journal had a Tax Report on the IRS efforts to crack down on taxpayers who attempt to evade taxes by forming entities with hidden ownership in states including Nevada and Delaware. The Journal says that the problem appears particularly severe in Nevada where random audits of Nevada corporations has exposes “widespread abuses.”The IRS is stepping up investigations of promoters of Nevada corporations as a wealth protection tool. In this case, these promoters are using “wealth protection” or “asset protection” as a euphemism for tax evasion.

As I have said many times before, asset protection may be a important element of estate planning and may be integrated with estate tax reduction, it usually has nothing to do with income tax. If s reduction. If someone is trying to convince you to set up a Nevada corporation for asset protection, please be careful and get a second opinion.

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

Nevis LLC For Professionals

Interest in the Nevis LLC is increasing. I received an email from a physician who lives and is licensed in Florida. He wanted to know if he could establish a medical business through a Nevis LLC. Under Florida statute, any licensed professional business has to be designated as a professional corporation (a PA) or a professional limited liability company (PC or PL). Nevis has no statute permitting a professional LLC. Even if it did, I suspect Florida law requires that the PA or PL be Florida entities. Nevis LLCs have limits, and this is one of them. I do not think they are appropriate for a professional practice.