Florida Asset Protection Blog

New Florida Resident Get Immediate Entireties Protection In Bankruptcy

I came across a bankruptcy case which is important for debtors contemplating moving to Florida from another state and filing bankruptcy immediately. In this case, a debtor lived in a state which had little or no homestead protection. In April, the debtor and his wife moved to Florida and bought a piece of property titled in their joint names. Two months later, in June, they filed Chapter 7 bankruptcy, and one month after filing bankruptcy the moved into a house on the same property. The issue was whether the debtor could claim an exemption for the property. The bankruptcy judge said he could exempt the property. Here’s why and how:

The general rule is that a bankruptcy debtor cannot claim Florida exemptions, including Florida homestead, in bankruptcy unless he has been a Florida resident for two years prior to filing. This debtor lived in Florida for less than three months prior to filing bankruptcy. Therefore, his bankruptcy is under the exemptions of his former residence which has little or no homestead protection. Even if the debtor were under Florida exemptions, he would not get homestead protection in bankruptcy because he and his wife did not occupy the house until after he filed bankruptcy.

The judge found that his real estate purchased in April was exempt as tenants by entireties property. Property owned jointly by married couples is deemed to be owned in a tenancy by entireties (T by E). T by E property is not party of the bankruptcy estate and is therefore “exempt”(unless and to the extent the debtor and his non-filing spouse have joint debts). But is not really “exempt” because neither the Florida statutes nor the Florida constitution are the source of T by E protection. In the bankruptcy code, T by E property is not excluded from the bankruptcy estate by the code sections dealing with exempt property, which code sections include the two-year waiting period for new Florida residents. The bankruptcy judge pointed out that T by E property is excluded from the debtor’s bankruptcy property by a different code section which provides exclusion of T by E assets owned by the debtor immediately prior to his filing bankruptcy. The T by E section has no two year waiting period.

The case held that even though the debtor purchased the real estate with his wife just three months prior to filing bankruptcy it was “exempt” as T by E property. The judge found no evidence of fraudulent conveyance; the debtor simply moved to Florida and bought a home to live in. Under the strict language of the statute nothing more is required to exclude the T by E property from his bankruptcy.

This case provides non-resident debtors a possible plan to move to Florida, buy a homestead property or other assets with their spouse, and file bankruptcy immediately upon becoming a Florida resident. Only debtors with no significant joint debts can use this planning technique

For those who require a cite: In re Schwarz 2007 WL 247649

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

Does Move From Florida Forfeit Tenancy By Entireties?

A debtor has long-established bank accounts in Florida titled jointly with his spouse. The accounts are protected from creditors as tenants by entireties property. The debtor and his family then move out of Florida to Texas. Texas is a community property state which does not recognized the concept, or exemption, of tenancy by the entireties. The debtor asks me whether his Florida bank accounts are protected after he moves to Texas.

I’m not familiar with a case on this issue, but in my opinion this debtor loses the protection of his joint bank accounts the day he unpacks his moving van in Texas. The debtor/creditor laws concerning real estate are based on the law where the property is situated so that this debtor’s jointly owned real property in Florida, if any, would remain exempt T by E property after he moves. The laws concerning personal property, including financial accounts, is based on the laws where the debtor resides. Once the debtor resides in Texas I think that he cannot claim an entireties exemption for his financial accounts wherever located.

A reverse move would have the opposite result, in theory. A Texan with marital bank accounts in Texas or Florida could achieve tenancy by entireties protection by taking up residence in Florida.

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

Offshore Banking

Often, asset protection clients asked me for recommendations about offshore banking. Many have preferences for banks in Caribbean islands which are reputed offshore asset protection havens. I always tell people that I do not have any first hand experiences with offshore banking, no offshore banking recommendations, nor any advice about how to open offshore bank accounts. I do, however, collect recommendations from other attorneys and my own clients and pass on these reports of other peoples’ experiences.

I find that most people with good offshore banking experiences have maintained accounts in banks within the European Union. No client has ever recommended to me a Caribbean bank; some other attorneys have given me names of banks or trust companies in the Caribbean or in Central America. The most enthusiastic recommendations I have heard in the past year have been about banks in Luxembourg, Liechtenstein, or Switzerland. Clients have suggested that anyone considering an offshore banking relationship travel to the country and meet with more than one bank. I understand that foreign banks do not open accounts by email or internet applications similar to our domestic internet banks. Also, people should investigate offshore banks and meet personally with their bankers in order to feel comfortable about transferring funds overseas. Choosing an offshore bank should be based on educated recommendations and personal due diligence rather than what one hears casually or reads on the internet.

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

When Are Annuity Proceeds No Longer Protected?

Florida Statute 222.14 protects from creditors annuities and the proceeds of an annuity. A client posed an interesting question about what happens when annuity proceeds are invested in a different type of asset which other asset is not asset protected. The issue is when do annuity proceeds turn into another type of asset. For example, suppose a Florida resident uses annuity proceeds to purchase a CD or stock, is the CD or stock protected if it is purchased solely with annuity proceeds? Does it make a difference if the annuity was held in a brokerage account and the CD or stock is purchased within the same account?

It seems that the general rule is that annuity proceeds continue to be exempt as long as they are traceable back to the annuity. I partially researched the issue and found a couple Florida bankruptcy cases which held that assets purchased with annuity proceeds are exempt from creditors if traceable to the annuity. These courts believed that the debtor may enhance or invest annuity proceeds in order to provide for his economic well being without losing the protection afforded by the Florida statute.

I think a debtor takes a risk, despite these court decisions, whenever annuity proceeds are transformed from cash into another asset class. There’s a significant chance a court is going to find that the debtor intended to convert annuity proceeds into another type of asset which is not protected. Logically, the investment and reinvestment of annuity proceeds would lose its character of protected proceeds over time. Where that point is may be depend on the particular fact of the case.

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

Another Asset Freeze Stops Asset Protection Move

I’ve warned many times on this Blog that a court’s asset freeze can stop asset protection planning in its tracks. As a result, speed is essential when trouble first appears on the distant horizon. For instance, a debtor had his financial advisor call me several weeks ago from New Jersey to discuss asset protection options including buying a Florida homestead. There was a potential civil lawsuit in sight, but no lawsuit was anticipated in the near future. During the next three months the advisor called several times to schedule and reschedule consultations, each time asking a few preliminary questions about moving to Florida. Neither the client nor the advisor ever scheduled a consultation nor took any action on their own toward moving from New Jersey. This week the same advisor called again and said that while the client’s civil suit was the main issue, the client was also going through a divorce and the divorce court just issued an order prohibiting the sale or transfer of any of the client’s assets. The advisor asked if it was still possible for the client to sell the New Jersey home and buy a primary residence in Florida to protect the client from the potential civil suit. Its too late.

The general rule is that a debtor can protect money invested in a Florida homestead at any time, even after a suit is filed or a judgment is recorded. However, one cannot transfer money to a Florida homestead in violation of a court order or general asset freeze. In this case, the sale of the New Jersey residence and move to Florida would subject the debtor to sanctions for contempt of court. No attorney is going to assist with this course of action. Moving to Florida for asset protection purposes is a life changing decision which requires careful thought. Yet, some debtors do not have time for deliberation and analysis. In this instance, a person facing multiple legal problems delayed action several months until, in the end, his assets will be devoured by a former spouse and possible civil creditors as well.

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

Proceeds From a Reverse Mortgage on Florida Homestead

Reverse mortgages tap into home equity by providing a lifetime income stream in exchange for a mortgage on your residence. A caller asked this week whether proceeds from a reverse mortgage on his homestead would be exempt from future creditors. Specifically, the caller was considering placing the reverse mortgage, moving from the property into a new homestead, and renting the initial homestead subject to the reverse mortgage

In the first place, I do not know if reverse mortgage programs require the borrower to maintain the mortgaged property as his principal residence. Assuming the caller could move into another homestead and retain the reverse mortgage, I think there is a possibility that a creditor could attack future loan payments after the borrower moves from the homestead, although I don’t know of any court decisions on this issue. As long as the borrower lives in the mortgaged property money received from the bank is homestead proceeds. A creditor probably could not garnish future payments. Moving from the homestead means that future payments are from equity in what is now a non-exempt rental property. (I assume the property has no other protection, such as tenants by entireties). The borrower, debtor, could argue that he acquired a vested right to future payments at a time when the house was homestead and that the exemption of all payments is locked-in at that time. In other words, the exempt or non-exempt nature of reverse mortgage proceeds is determined when the mortgage is placed and not when each payment is received.

In any event, payments received and deposited in the debtor’s financial account would no longer be exempt even if payments were deemed proceeds of homestead equity, unless the bank account is otherwise exempt from creditors. Money from the sale or finance of a homestead is only exempt in a bank account if the money is segregated and intended to purchase a new homestead within a reasonable time. Using reverse mortgage proceeds to purchase directly an exempt financial asset, such as an annuity, would extend protection.

What Is Extent of Protection For Annuity Proceeds

reader asked about the protection of annuity proceeds. Florida statutes protects both annuities and the proceeds of an annuity. The reader said he deposited annuity proceeds in a normal checking account and then moved the money to a separate money market account. The funds in both accounts, he said, are traceable to the annuity

I do not know of any cases which discussed how far courts extend protection to annuity proceeds. I think the traceable annuity withdrawals are protected in the checking account. Theoretically, the proceeds should be protected in a money market account. At some point, these proceeds would become vulnerable and difficult to trace. My advice to debtors relying on the annuity exemption is to keep it simple. Put annuity proceeds in a segregated bank account and either keep them there or transfer the proceeds to another protected asset such as a tenancy by entireties account or homestead.

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

How To Free Trapped Profits From A Professional LLC

I often get asked how a licensed professional with a money judgment entered against him can get money out of his professional business. If the professional is head of household he can exempt and protect salary paid him from his own business (subject to some conditions). If the professional’s business is a professional limited liability company then his creditor cannot levy upon profits, after salary, which are retained in the business, but the creditor could get a charging lien on any profit distributions made from the professional business to the owner. For tax purposes, many professionals would prefer to pay themselves in profit distributions rather than salary, yet with a charging lien profits would be trapped inside the llc.

If the LLC were owned not by the professional debtor but by his spouse or by he and his spouse as tenants by entireties then the ownership interest would be exempt from this individual creditors and there could be no charging lien. However, in Florida, many professions (including attorneys) must own their businesses in their own name. They cannot hold membership interest in the name of their spouses.

An attorney I know contacted me with his thoughts concerning “trapped profits” in a judgment debtor’s professional limited liability company. He suggested that a professional llc owned individually by the professional could free profits trapped by a charging lien by overpaying income tax withholding and quarterly estimated to the IRS. Assuming the professional judgment debtor is married and files a joint tax return, the IRS would the following year issue a large tax refund to the debtor and his wife jointly as they had filed a joint return. The refund check payable to the debtor and his wife would appear to be exempt from the individual’s creditors as tenancy by entireties property. The money could be deposited into the couples protected joint bank account.

Technically, this device is a fraudulent transfer from the debtor’s business to he and his wife. The tax refund although payable to husband and wife actually represents a refund of the debtor’s payments to the IRS from the earnings of his solely owned business. Yet, in practice, only an unusually skilled and persistent creditor attorney would figure out the nature of the tax refund.

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

Protection Of Wages Deposited in Internet or Foreign Bank

Florida Statute 222.11 protects from creditors’ garnishment earnings of a debtor who is a head of household. The wages are protected for six months after they deposited in the debtor’s financial account. Some people set up financial accounts where nothing but wages are deposited. These so-called wage accounts are used to clearly isolate and trace protected wages after they are deposited. A reader asked me whether a Florida resident can establish a “wage account” at an internet bank or an out-of-state bank with no Florida branches.

The Florida statutes have no requirements about “wage accounts” in order to protect deposited salary. In fact, the ideal of a segregated wage account is not found in the Florida statutes. The protection of deposited wages depends more on the debtor’s residency and place of employment being in Florida than the locus of his financial accounts. I am aware of no Florida court decisions which limit protected wages to deposits in Florida banks. Therefore, I expect that the wages paid to a Florida head of household would be protected in an internet bank or foreign bank account. As a practical matter, however, deposits in other states may be vulnerable to judgments in those states where wages are deposited. The safest thing is to maintain protected wages in a bank with no branches outside of Florida.

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

Homestead Protection After Death

Homestead protection from your creditors persists after your death. An attorney from another state asked me the following question. Suppose creditor C has records a civil judgment against debtor D in Florida. D is a Florida resident and lives in a valuable Florida homestead property. D dies leaving his estate, including his homestead, to his adult children. The question is whether D’s personal representative has to sell the homestead to pay C’s money judgment after D’s death.

D’s homestead protection applies to his estate. C cannot levy upon the house after D’s death. The personal representative will transfer the homestead to D’s children as tenants in common. After the transfer the childrens’ own creditors, if any, could levy on the property unless the child, himself, moves into the house and makes it his own homestead.

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

Can Divorce Order Defeat Homestead Protection?

A man is going through a divorce proceeding in California. The man and his wife sell their California house. The husband takes all the sales proceeds and gives his wife other assets including his retirement account. The husband then moves to Florida and buys a homestead property with the proceeds from the sale of the California house. . The man becomes a Florida resident. At the end of the divorce proceeding the judge orders the man to pay additional money to his ex-wife from the house sale proceeds now invested in the Florida homestead. The man asked whether his homestead is protected from the order of the California divorce court.

Florida’s homestead laws offer broad creditor protection, but there are some exceptions. Florida courts have permitted partition (forced sale) of homestead in divorce proceedings to effect an equitable distribution of assets. If the wife domesticated the California divorce order in Florida, I suspect a Florida court may order the sale of the husband’s homestead to give the wife her share of the house equity as determined in California.

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