Florida Asset Protection Blog

Florida Supreme Court Debates Charging Liens For Single Member LLCs

In a blog post earlier this year I reported that the 11^th Circuit Court of Appeals had certified to the Florida Supreme Court the question of whether a charging lien was a judgment creditor’s sole remedy against a debtor’s membership interest in a single member LLC. The Florida Supreme Court held oral argument on this case on January 8, 2009. A decision should be issued soon. The case is Shaun Olmstead v. Federal Trade Commission, SC08-1009.

The Florida Statutes provided that creditor remedies against a membership interest is limited to a charging lien against the member’s economic interest and distribution rights. The Statutes do not distinguish between multi-member LLCs and single member LLCs in this regard. I listened to a recording of the oral argument. Most justices expressed the opinion that the charging lien remedy was designed to protect innocent members/partners in an LLC or partnership, and that the charging lien restriction did not serve its intended purpose when there were no members other than the debtor. The court also recognized that the Statute clearly did not attempt to distinguish between mult-member and single LLCs. The court and the attorneys debated whether the Supreme Court should or could change the charging lien procedure for single member LLCs within the existing statutory framework without judicial modification of the statute.

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

Segregating One Half Acre Within A Municipality As Protected Homestead

Two clients in the past week have owned homestead properties in a municipality on lots greater than ½ acre in size. Both clients were judgment debtors and were asking if there was a way to protect their entire residence under Florida's homestead protection. One situation was particularly interesting. This client owned 3/4 acres within a city on which he build a main house and a guest house. While remodeling the main house, the client and his family temporarily lived in the guest house. Local zoning and land use laws permitted the client to further subdivide the property. The client understood that Florida's homestead law protected two-thirds of his 3/4 acre homestead within the city limits. The client asked if he could convey one-third  of the homestead lot to a family partnership which itself offers some asset protection reserving ½ acres under the homestead umbrella. The client, his spouse, and his children would be partners in the partnership. The client proposed that the land transferred to the new partnership would not include the main house or the guest house.

I told this client that I did not think his solution would work. When a debtor owns more than ½ acre in a municipality the homestead protection is pro-rata as to the entire property. The Constitutional homestead protects a proportion of the total value rather than a proportion of the underlying real estate. In this case, two-thirds of the property value is protected and one-third of the value is not protected. If the debtor conveyed one-third acre to a family partnership, I think a court would hold that two-thirds of the land transferred was an exempt asset and one-third of the transfer pertained to non-exempt assets. A creditor could challenge the transfer as a fraudulent conveyance as to one-third of the value transferred to the partnership. In past bankruptcy court cases the courts have not permitted bankruptcy debtors to carve out a protected ½ acre of land under the homestead protection when the entire parcel inside a city exceeded the allowable ½ acre homestead.

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

Homestead Trivia: Why Florida Protects 160 Acres

The Florida Constitution protects 160 acres of contiguous property used as the debtor's primary residence. Sometimes people ask me why Florida has such a large homestead exemption and what is the signficance of 160 acres. A recent article in the Florida Bar Journal discussed the history of Florida's homestead exemption.  Bar Journal Article. The article traces our homestead exemption to the Armed Occupation Act of 1842 enacted by the U.S. Congress to help attact people to new U.S. territories including Florida. The law set the maximum homestead at a quarter section of land, or 160 acres. You may have learned in school that a section of land is 640 acres. The policy basis of our homestead law is interesting. The homestead provisions are not intended to shield wealthy debtors from their creditors. The Constitutional homestead law comes from the public policy of attacting people of modest means to the new Florida territory and providing them a secure and protected estate which they could farm and could build a secure future for their family.

Debtor May Be Able To Add Asset Protection Provisions To An Irrevocable Trust

Most families want simple estate plans. Sometimes the simple plan, a will leaving our money to our children equally and immediately upon our deaths, is a really bad estate plan in the event any of our children have legal problems after our deaths. A better plan, for asset protection, is an estate plan that holds the childrens’ inheritance in a continuing trust where it remains protected from our childrens’ creditors as long as they keep the trust in effect. A caller this past week told me his parents, recently deceased, had made a living trust which provided for the immediate distribution of his inheritance. The parents’ trust was in the process of administration. The caller was concerned because he had a large potential judgment creditor. I explained that a judgment creditor could levy upon his share of the inheritance. The creditor could garnish the money payable to the debtor from the living trust.

If the debtor’s parents were still alive they could amend their living trust plan to protect this child’s inheritance in a continuing trust. However, after the parents are both deceased their living trust is irrevocable. The client wanted to know if it was possible to amend the provisions of his parents’ trust when his parents are no long alive.

There are Florida statutes that provide for the modification of an irrevocable trust after the deaths of the trustmakers. Modification does not require a court order. The statutes state that the terms of an irrevocable trust may be changed with the consent of all the beneficiaries and the acting trustees. Contingent beneficiaries- people who may have a future interest in the trust estate- would probably have to agree to the modification. In this instance, if the caller and all his sibling beneficiaries, together with their adult children who have a potential future interest, agreed to modify their parents’ trust they may be able to add asset protection provisions. The modification could apply only to the debtor child without affecting the other beneficiaries’ inheritance. The family could amend the trust so that only money payable to the debtor child be maintained inside the trust under terms and conditions protecting the inheritance from the child’s creditors.

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

Workers' Compensation Proceeds: Are They Exempt From Creditors?

Florida Statute 222.11 protect from garnishment wages and other compensation earned by a head of household, and it further exempts wages deposited in the debtor’s bank accounts. . A client asked me this week if workers’ compensation payments were exempt under the wage exemption statute. The client thought that if the law protects wages paid to an employee the law should also exempt money paid on account of injuries incurred during employment. I found that the wage exemption statute, 222.11, does not exempt workers’ compensation, but that other Florida Statutes provide an exemption from creditor garnishment.

Florida Statute 222.11, the wage exemption statute, does not mention or even refer to workers’ compensation payments. Workers’ compensation is dealt with in Chapter 440 of the Florida Statutes. Section 440.22 provides that payments due the beneficiary of workers’ compensation cannot be assigned and theat the benefits due or payable are exempt from claims of creditors. The statute does not specifically exempt workers’ compensation after it is paid and deposited into a bank account. However, the Florida Supreme Court has interpreted the statute and the legislature’s intent to protect workers’ compensation proceeds after they are paid and deposited so long as the debtor is able to identify the money deposited in the bank to workers’ compensation. The case is Broward v. Jacksonville Medical Center, 690 So. . 2d 589

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

Informal Family Business Arrangments Can Unintentionally Expose Assets To Creditors

Business arrangements among family members are usually informal without full legal documentation. Casual business dealings among family members work fine between the family members themselves as long as the family relationships are on good terms. But, when the same family members have creditor problems an informal family business dealing can lead to problems when proper documentation is lacking. Consider a caller who described a property he purchased with his parents. The deed showed the parents and a child each had an undivided 50% interest in the property as tenants in common. This means that each 50% interest is separate from the other 50% interest. The parents paid cash for their interest. The child borrowed 50% of the purchase price to pay his part of the purchase. The child made all the mortgage payments by himself. The bank demanded a mortgage on the entire property, not just the child’s half, to secure the loan. The property has not changed value since the purchase.

Now, the child has a potential creditor. The child wants to know if his half interest is fully protected by the mortgage and whether; the creditor can reach any part of his parents’ share of the equity. There is no written agreement among the family members expressing who is liable to pay the mortgage.

The family intended that the child would be fully responsible for the mortgage and that the mortgage would be paid first from the child’s share of the property before the debt would affect the parents’ interest. It would help if the family reduced the agreement to writing. Even with a written agreement, once the bank insisted on a mortgage of the entire property (as most banks would do) then the mortgage security applies equally to the parents and the child’s 50% interest. Each partner, the child and the parents, have an equal amount of equity in the property equal to about half the fair market value. I think the child’s creditor could levy upon the equity in the child’s undivided interest. The creditor could probably force a sale of the property and take half the net proceeds after payment of the mortgage.

The strict legal interpretation of this arrangement is that the parents gifted 50% of their contribution and 50% of the equity to the child. Once the bank demanded a mortgage on the entire property the parents should have recorded a second mortgage and note due from the child to repay the parents’ contribution to the child’s 50% undivided interest. If the parents were to record their mortgage after the child had a creditor problem the mortgage could be undone as a fraudulent transfer.

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

Mortgage Modification Plan My Have Income Tax Effect For Investment Property

A homeowner may incur income tax liability for debt forgiveness when a bank forgives a portion of a mortgage either by taking a deed in lieu of foreclosure, through a short sale for part of the mortgage balance, or by relinquishing rights to a deficiency judgment after foreclosure sale. Owner occupants are exempt from imputed income. A caller this past week asked me about income tax treatment from a mortgage modification. In this case, the mortgage lender had proposed forgiveness of past-due interest and late fees. The accounting question is whether the modification has the same income tax effect as forgiveness.

I do not know the answer to this question; the issue is one of tax accounting. I assume the income tax effect of a mortgage modification plan depends on the terms of each individual plan. For instance, if the mortgage lender restructures the payment stream there is probably no income tax effect. However, when the modification involves any write-off of interest or principal then income tax issues are involved. Anyone considering a mortgage modification plan either through a government designed program or a lender’s voluntary program should consult with a tax expert when the modification involves other than your primary residence.

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

Don't Leave Your Money To Your Children: Leave It To A Trust

Most parents want to keep their estate planning simple. The simple estate plan is not the best plan when your children are vulnerable to lawsuits. If a parent dies leaving money to his children outright and one of the children has an outstanding civil judgment at the time of the parent’s death, the child’s creditors can seize the inheritance to satisfy the judgment. If the child puts the inheritance in a joint account with his spouse in an attempt to protect the money under the tenants by entireties exemption the creditor in most cases can reverse the conveyance as a fraudulent transfer placing the inheritance back in the child’s own name where it could be used to satisfy the judgment. Few parents anticipate their hard-earned estate going to a creditor of one of their children. Proper estate planning protects your money not only from your own creditors during your lifetime but also from unknown future creditors of your children.

The better estate plan leaves the families inheritance in trust for the children . Interest and principal is distributed to meet the children’s reasonable needs. The timing and amount of distributions is left to the discretion of the trustee of the childrens’ trusts. The parents can set us a common trust for all children or separate trusts for their respective children. The terms of conditions of each child’s trust may be different as appropriate for the child’s needs. If one child is highly unlikely to have legal problems during their lifetime the parents may distribute that child’s share of the estate outright without a trust.

As long as the trust document has a standard provisions known as a "spendthrift clause" no creditor of any child can invade their inherited trust. Under Florida’s new trust law a child can serve as the trustee of his own trust, with the discretion to make distributions to himself, and his inheritance is still protected by the spendthrift provision.

Making a will or living trust with inheritance trusts for your children is difficult to do properly without professional legal help. For estate planning attorneys, drafting a will or living trust with standard spendthrift protections for the children is not difficult. People concerned with asset protection during their lifetime should make sure that their money is protected after their death for the benefit of other family members. Trust planning is one of the best tools for this purpose.

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