Florida Asset Protection Blog

Protection Of 401K Retirement Proceeds

A client recently withdrew large sums of money from his 401 k plan to pay living expenses. He deposited the money in his bank account. The client wants to know if the money is protected from creditors after it has been deposited in his bank account. The Florida statutes exempt many specific assets including retirement proceed and annuities. The annuity statute specifically exempts not only the annuity but the proceeds of the annuity. The statute protecting retirement funds does not address proceeds paid from retirement funds.

I conducted initial legal research while the client was in my office. I quickly found several bankruptcy cases which held that retirement proceeds are exempt. The courts reasoned that although proceeds are not mentioned in the statute the legislature intended to protect retirement money and that protection extended to proceeds deposited in financial accounts. There may be cases with opposite holdings. Florida courts interpret exemption statutes liberally for the debtor's benefit. More likely than not retirement proceeds would be protected from creditors.

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

Garnishment Of Wages Paid By Florida Company To Texas Resident

A lady residing in Texas emailed me about a judgment entered in a Texas court over 10 years ago. She works in Texas for an employer which has its main corporate office in Florida. The Texas creditor domesticated its judgment in Florida. The creditor had the Florida court issue a wage garnishment which the creditor served on the employer at its corporate office in Florida. The lady said that she is head of household as she is divorced and supports her minor child. She asked whether the creditor can garnish her wages in Florida as opposed to Texas where she resides, and whether she can take advantage of Florida laws preventing garnishment of head of household.

Florida law would apply to creditor attack on real estate located in Florida and owned by a non-resident. As to personal property, including wages, the applicable law is based on the debtor's residence; in this case, Texas. Because the debtor is not a Florida resident she cannot claim head of household exemption. Florida courts have held that the wage garnishment statute is designed to protect wages of people who are Florida residents at the time the wages were earned. The creditor can garnish wages at the employer's principal office in Florida. Otherwise, wages paid anywhere in the country by a Florida company would escape garnishment; such is not the intent of the statute.

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

Equitable Liens On Homestead Under The Havoco Case

The well-known case of Havoco v. Hill decided by the Florida Supreme Court in 2001 is the basis upon which debtors can protect non-exempt assets from existing creditors by converting the assets for the purchase or improvement of Florida homestead. The Havoco case permitted an exception to homestead protection where funds invested from the property came from fraud or other egregious circumstances. In such cases, the Supreme Court stated that the aggrieved creditor could get an equitable lien on the homestead although the creditor still could not force the sale of the house. The "fraud exception" in Havoco has lead to some court decisions in the past few years which have clarified the exception to fraudulent transfers into the homestead shelter. Some creditors believed, or at least have argued, that blatant fraudulent transfers, where the fraudulent conversion of money to the homestead is obvious and timed solely to avoid debts, are sufficiently "fraudulent" or "egregious" so as to warrant an equitable lien on homestead property.

Courts have clarified the fraud and egregious circumstance exception to Havoco to show that an equitable lien is appropriate only where the funds converted were obtained through fraudulent activity . For instance, in the Florida appeallate case of Willis v. Red Reef, Inc, the District Court of Appeal held that equitable liens are limited to situations where homesteads are purchased with the fruits of fraudulent activity, and that fraudulent diversion of legally obtained money to homestead is not the type of activity which calls for an equitable lien. In the bankruptcy case of In re Chauncey the eleventh circuit federal court of appeals held that diverting to homestead money obtained from a personal injury settlement on the to avoid creditors' attack against the settlement proceeds could not warrant an equitable lien. However, the same fraudulent transfer, although not impairing the homestead, did warrant a denial of the debtor's bankruptcy discharge because the debtor had transferred funds to avoid creditors.

Equitable liens are appropriate only where the money invested in the homestead was directly obtained by the debtor's fraudulent or egregious conduct other than the conduct of fraudulent conversion of the same money into the debtor's homestead.

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

Florida Residency Issue

Florida residency is based on intent. A person is a Florida resident if and so long as he intends to make Florida his permanent home. I recently spoke with a client who wanted to know if he qualified for homestead protection as a Florida resident under the following fact situation. The client lived in Denver for 13 years where he was a company employee. The company relocated him to Florida. The client bought a home in Florida and moved into the home as his permanent residence. Six months later the employer relocated him back to Denver where he has been working for the past nine months. The client rents an apartment in Denver. He still owns his Florida house which is vacant. He keeps most of his furniture in Florida. The employer is paying his Florida mortgage. The client did not yet file a claim for homestead tax exemption. The employer does not know, and the client does not know, if an when he will be relocated in Florida, although the client would like to move back to Florida. The client has a Colorado drivers license and is not registered to vote in either Florida or Colorado. Some mail is addressed to Colorado, and other mail is addressed to Florida and forwarded to the current address in Colorado.

This is an example of a situation of uncertain residency. I do not think a court would find this person to be a resident of Florida, and I do not think the Florida house qualifies as a Florida homestead. Only people who establish Florida residency can claim homestead protection. This person’s residence is determined primarily by his employer, and the facts suggest that the person’s permanent residence is in Colorado with a brief work assignment in Florida. If a creditor recorded a judgment in Florida in the county where the home is located I believe the judgment would immediately attach to the Florida property.

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

Friends And Family In Florida Asset Protection Planning

Many clients believe that their family members and friends can be part of their asset protection plan. This week one of my clients consulted with me about whether his interest in a wholly owned limited liability company business would be an effective defense against a possible civil judgment against the client for actions unrelated to the operation of the business. The client understood that the creditors’s collection remedy against his interest in the LLC would be limited to a charging lien on distributions from the LLC to the client/owner. However, the client was concerned about not being able to receive money earned by the LLC which the client had relied upon to pay personal expenses. The client made several proposals and suggestions about how his friends and family could help him receive money from his limited liability company. These suggestions included, for example, the LLC paying salary to a friend and having the friend pay his personal bills; borrowing money from a family member secured by a lien on LLC distributions but then paying back the loan in cash; selling his LLC interest to a friend for nominal consideration with an unwritten understanding that the client was entitled to profits and loans from the LLC etc, etc.

Friends and family are not asset protection tools. It is almost always a bad idea to base an asset protection plan on your trust in your friends and family. The well-intentioned help from those closest to you, and from people you most trust, usually has unintended poor consequences for all involved. Any fraudulent conveyance actions will name the cooperating friend or family member as a defendant. Your asset protection plan will drag your friend or family member into your legal problems and require them to get their own attorney to protect their interest. The creditor has the right to question under oath anyone who is involved in your business or financial picture. When placed under oath your best friends and favorite family member will likely choose to tell the truth rather than commit perjury. Although initially cooperative, these people will ultimately undo the asset protection plans to protect their own family financial interest. In Florida, there are usually effective asset protection strategies that do not rely on other people, especially those people whom you care for.

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

Mortgage Deficiency Judgments In Florida

More and more calls and emails are coming from people in trouble with investment real estate. The typical person is concerned about his personal liability and vulnerability of assets in the event one or more of his real estate investments is foreclosed by mortgage lenders. A deficiency judgment refers to a lender’s judgment against the borrower for the difference between the outstanding balance of the mortgage note, plus costs and attorneys fees, and the value of the property foreclosed. The property value is determined on the date of the foreclosure sale. In Florida, a foreclosure does not automatically result in a deficient judgment. The mortgage lender has to file a motion for a deficiency after the foreclosure sale, and the court holds a separate hearing on the lender’s request for deficiency liability.

The mortgage lender has to show the court evidence that the property’s value was less than the note balance. The borrower has the opportunity to present his own evidence that the property value was equal to or exceeded property value. If the property was worth more than note balance on sale date the court will not give the mortgage lender a deficiency judgment against the borrower. During the real estate boom deficiency judgments were uncommon because increasing real estate values brought home values above note balances of defaulting mortgages. In the current real estate recession, we may see more lenders pursue deficiency judgments against borrowers who they believe are collectible.

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

Income Tax Liaibility From Deed In Lieu Or Short Sale

Many real estate investors have serious financial problems due to declining real estate values and credit problems. During the past few months a large portion of my banrkuptcy and asset protection inquiries are from people who find themselves unable to pay mortgages they used to buy investment real estate near the end of the housing bubble. Several of my callers, and people who have become clients, have asked me about the consequences of giving a bank a deed in lieu of foreclosure or selling the property for less than full mortgage balance as part of an agreed “short sale.” (A “short sale” is where the bank agrees to accept less than the mortgage balance to release the mortgage in order to facilitate a sale and partial recovery of the loan). One issue that frequently is discussed is the income tax consequences for the borrower from a short sale of deed in lieu as opposed to letting the bank foreclose. Income tax may be imposed for a cancellation of a debt. (“COD”) I am not an income tax professional. Recently, I posed the question to my personal CPA, Mr. Lonnie Young of Lake Mary, Florida, and asked him to explain the income tax consequences of giving property back to a mortgage lender.

Mr. Young responded that the borrower does not recognize income tax for COD from a foreclosure, but there is addtional income tax liability from either a short sale or a deed in lieu of foreclosure which results in COD. He sent me a passage from one of his CPA tax books pertaining to the issue, which information I am quoting below for everyone’s benefit.

Why is it that I may have both gain (or loss) and COD income upon foreclosure of my house?

In many home foreclosures, the mortgage debt is recourse and the fair market value (FMV) of the house is less than the unpaid face amount of the debt. Often in this situation the borrower/debtor transfers the house to the lender (or to a third party), either through a deed in lieu of foreclosure or as a result of a foreclosure proceeding. This transfer is treated as a sale or other disposition of the property and results in the borrower/transferor realizing gain or loss. At the time of the transfer, the lender often cancels the remaining mortgage debt, leading to COD income.

Different rules may apply if the mortgage debt is nonrecourse.

What is COD income, and how is it calculated?

Loan proceeds are not included in income when received because there is an offsetting obligation to repay. However, if the debt is cancelled in part or full in a foreclosure proceeding, you will have COD income equaling the difference between the unpaid amount of the debt and the FMV of the property you transfer to the lender or a third party to discharge that debt. For example, if your debt prior to foreclosure was $200,000 and the FMV of the property was $170,000, you would have $30,000 of COD income.

Note: If you borrow money from a friend or relative and he or she cancels all or part of the debt, the cancellation often is treated as a gift from the lender to you. Gifts, including gifts of cancelled debts, are excludible from income. However, the cancellation of debt by a commercial lender is not a gift.

Can the amount of COD income be affected by other liabilities relating to the property?

The existence of other liabilities, such as property taxes, can either increase or reduce the amount of your COD income. For example, there may be unpaid property taxes that are treated as imposed on you for federal tax purposes. If you have not provided funds to pay the property taxes, the taxes generally either remain as unpaid charges against the property after foreclosure or must be satisfied from the sales proceeds from the foreclosed property prior to any application of such proceeds to satisfaction of the debt. The unpaid liabilities reduce the amount of the FMV of the property that is available for satisfaction of the debt and must be taken into account in computing the amount of COD income.

For example, suppose your debt prior to foreclosure was $200,000 and the FMV of the property was $170,000, but you had $10,000 of unpaid property taxes. In this situation, because the FMV of the property available to satisfy the debt would be only $160,000 ($170,000 FMV less $10,000 unpaid taxes), the COD income would be $40,000 ($200,000 debt less $160,000 FMV).

On the other hand, if you pay property taxes that for federal income tax purposes are treated as imposed on the owner of the property, this may reduce the amount of your cancelled debt income. Thus, if you paid $10,000 of property taxes that for federal income tax purposes are imposed on the owner of the property after the foreclosure, your FMV would be $180,000 ($170,000 plus $10,000) and your COD income would be $20,000 ($200,000 debt less $180,000 FMV).

How do I compute gain or loss on a disposition by foreclosure?

Gain or loss is the difference between your amount realized and your adjusted basis in the property. In general, an amount realized by the transferor on a foreclosure or other transfer of property is the sum of:(1) the amount of money received; (2) the FMV of any other property received; and (3) the amount of any other liabilities that the transferee (the person acquiring the property) either assumes or takes the property subject to.

Give an example involving recourse debt in which both gain and COD income results on the foreclosure.

If the face amount of the recourse debt is $200,000, the FMV of the property is $170,000, and the adjusted basis is $120,000, you have $30,000 of COD income ($200,000 debt less $170,000 FMV) and $50,000 of gain ($170,000 FMV (amount realized) less $120,000 adjusted basis).

If the mortgage debt is nonrecourse, is there COD income on the foreclosure?

If your mortgage debt is nonrecourse, the debt is greater than the FMV of the house, and the house is foreclosed upon, your amount realized will be the face amount of the unpaid mortgage debt. Thus, if the amount of the nonrecourse debt is $200,000, the FMV of the property is $170,000, and the adjusted basis of the property is $120,000, your gain on foreclosure is $80,000 ($200,000 amount realized less $120,000 adjusted basis). No portion of the gain on property subject only to nonrecourse debt is COD income.

If your house is foreclosed upon and your mortgage debt is recourse, are there circumstances in which you may have gain or loss but not COD income?

There are at least two situations involving recourse debt in which foreclosure results in gain or loss, but not in COD income.

First, sometimes when a house is transferred to the lender by foreclosure the lender does not cancel the remaining unpaid portion of the debt. This could happen if the lender believes it can still collect the balance of the debt. In that circumstance, you would not have COD income until the lender discharged the debt or the statute of limitations on collection of the debt expired. The gain or loss on the foreclosure is the difference between the FMV of the property and its adjusted basis.

Second, sometimes the FMV of a house that is foreclosed upon is greater than the amount of the debt. If the FMV is sufficient to pay the debt in full, the debt is satisfied and there is no COD income because no part of the debt was discharged or cancelled. For example, if the FMV of the house was $200,000, the amount of the debt was $140,000, and the adjusted basis of the house was $110,000, the gain on the sale of the house is $90,000 ($200,000 FMV (amount realized) less $110,000 adjusted basis), but there is no COD income because the FMV of the house is $60,000 ($200,000 FMV less $140,000 debt), which is more than enough to satisfy the debt in full.

Can COD income ever be excluded from my gross income?

You may be able to exclude all or part of the cancelled debt income if all or part of the debt was discharged in bankruptcy, if you were insolvent immediately before the transfer, or if the debt is a qualified farm debt or qualified real property indebtedness. Refer to Publication 908 (PDF),Bankruptcy Tax Guide.

How do I report COD income on my return?

COD income is ordinary income and is reported on Line 21 of your return.

Can gain on the foreclosure of my house be excluded from my gross income?

If the house is your principal residence, you may be able to exclude part of all of the gain under I.R.C. 121. See Publication 523, Selling Your Home.

How do I report a foreclosure gain or loss on my return?

Gain or loss on the foreclosure of your house usually is capital gain or loss. However, a loss on the foreclosure of your residence is not deductible. Capital gains are reported on Form 1040, Schedule D (PDF). If, however, the gain on the foreclosure of your residence is excluded under I.R.C. 121, you are not required to report the gain on your return.

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

Protection Of Valuable Personal Property

Valuable personal property owned free and clear is difficult to protect from creditors. Consider, for example, my client who owned outright a private airplane. The client was unmarried and owned all assets in his individual name. The client had imminent legal problems so that any transfer of the airplane title would probably be deemed a fraudulent conveyance. One option was for the client to pledge the airplane for a bank loan. That option had two problems. First, my client did not have good credit and a loan secured by the airplane alone would be difficult and expensive. Secondly, he did not want to pay interest on a personal property loan and he had no place to shelter the loan proceeds if he did get the loan.

His main asset protection tool was to be the purchase of a new homestead and getting a home equity line of credit to borrow money for living expenses.

My client decided to pursue a combination of his home equity loan and a loan secured by the plane. He intends to propose that his bank cross-collateralize a line of credit on his house with a lien on his airplane. This solution would not incur interest costs over and above his home equity loan. He would not have excess loan proceeds to protect as borrowed funds would be spent as needed for expenses. It will be interesting to see if this client encounters problems in structuring a real estate mortgage cross-collateralized with a lien on his airplane.

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

Maximizing Homestead Protection From Two Properties

Money from the sale of a homestead, if not invested in a new homestead, can still be protected after the sale if invested directly from the closing in otherwise exempt assets. There is no fraudulent conveyance or fraudulent conversion if exempt money is invested or transferred directly to protected assets or third party ownership. Consider a client who told me last week that he had moved from his former homestead into a new house and had put the old house up for sale. The new home was titled in the name of a limited liability company rather than in the individual names of the client and his spouse. The client had concerns about liability and potential litigation from a real estate investment. His question was how he could maximize homestead protection between the two properties given he was willing to reside in either house.

His current residence does not have homestead protection. Even though the house is his principal residence, homestead protection is available to property owned by natural persons. An LLC is not a natural person, and residences owned by an LLC does not qualify for Florida homestead. Proceeds from the sale of the former residence will not be protected because that property is no longer homestead. After the client moved the house is investment property.

To optimize protection I suggested that the client move back to the former residence owned in his personal name and establish that again as his primary residence. If and when the house is sold he can move back to the LLC’s house, pay down some of the LLC’s mortgage, and convey the house from the LLC to his individual name. The transfer of title to homestead and paying off the mortgage should not be a fraudulent conveyance or conversion. Any sale money from the first house not applied to the LLC house could be directly invested in protected financial assets such as annuities or life insurance.

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

Is Permanent Residency A Requirement For Tenancy By Entireties Protection

An attorney called me last week about his foreign client who owned Florida jointly with his wife. Neither the client nor his wife had a green card, although both had visitor visas entitling them to be in the United States and Florida for a limited time. The attorney represented the husband as a defendant in a civil lawsuit in Florida court. The attorney asked me if the real property was exempt from his client’s individual creditors as tenants by entireties property. The issue is whether a temporary visitor to Florida can qualify for Florida’s tenancy by entireties protections.

Permanent residency is an issue in homestead protection. Florida courts have ruled that residents without permanent visas (green cards) cannot claim homestead because legally they are unable to resided permanently in Florida or any other state. Permanent residence is not a requirement for tenancy by entireties. T by E protection is a common law protection rather than a creation of Florida statute so there is no statutory requirement of permanent residency either. Tenancy by entireties is a concept of property ownership without residency qualification. I told the attorney that in my opinion any married couple owning joint property in Florida can claim entireties protection as to the Florida property.

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