Florida Asset Protection Blog

Estate Planning Trusts Can Jeopardize Homestead Protection

Asset protection planning is part of estate planning. Tax planning is part of estate planning. Often, however what is good tax planning is not good for asset protection. A recent example is a client who is attempting to reduce their taxable estate by using a estate tax tool called a qualified personal residence trust ("QPRT"). The QPRT is a well-known estate tax reduction technique whereby the taxpayer transfers a residence to a trust and retains use of the residence. After a period of time specified by the trust title to the property passes to the heirs who rent the property back to the former owner and trustmaker. The technique freezes reduces the value of the residence for estate tax purposes. The asset planning issue is that conveyance of a primary residence to a QPRT probably strips the house of homestead protection in Florida. The Florida Constitution protects homestead owned by a natural person. Courts have protected homesteads owned by living trusts where the debtor is the trustmaker, trustee, and beneficiary. A QPRT involves third party beneficiaries and often third party trustees. I do not think a QPRT can own a homestead in Florida.

Nor can the trustmaker remove a residence from a QPRT and back into his individual name for asset protection purposes. QPRTs must be irrevocable to have their intended tax effect. A trustmaker cannot legally withdraw property from an irrevocable trust. Some QPRT trust agreements will have asset protection provisions, such as prohibiting any creditors from asserting an interest in the trust property. Without asset protection provisions in the document a trustmaker’s creditors could attempt to levy on the interest the trustmaker retains in the property. Also, if the trustmaker tries to contribute money to the QPRT to pay the mortgage a creditor could attack the payment as a fraudulent transfer. If the same residence were owned in the trustmaker’s individual name as his homestead the debtor/trustmaker’s reduction of mortgage principal could not be undone under Florida’s fraudulent transfer laws.

If and when you consult with an estate planning attorney make sure the attorney understands your asset protection concerns. Whether estate tax reduction or asset protection planning is of primary importance depends on the individual situation. Be aware that using asset protection tools may not be optimal estate tax planning, and that estate tax tools sometimes reduce asset protection.

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

First Mortgage Lender Sues For Deficiency Judgment

As a general rule, mortgage lenders have not been pursuing deficiency judgments during the real estate recession. Second mortgage lenders have sued borrowers individually in cases. Until this week I have not spoken with any client who had been sued for a deficiency claim by a first mortgage lender after or as part of a foreclosure. I have spoke to many attorneys who defend mortgage foreclosures none of whom have reported seeing a deficiency claim by a first mortgage lender in any of the cases they are handling. This week, I saw my first deficiency judgment by a first mortgage lender. Whether this is an isolated incident by one bank in one real estate development, or an indication of changing bank policy and greater risk for mortgage borrowers is unclear.

The particular client retained me to file Chapter 7 bankruptcy because of large amounts of unsecured credit card debt. The mortgage deficiency was just one of his credit problems and was not the main problem behind the bankruptcy. The client had borrowed money to buy an investment lot in a Ginn community from Branch Banking and Trust ("BBT") secured by a first mortgage. There was no second mortgage. The lot was unimproved. BBT filed a Motion for Deficiency including a purported property value supported by a copy of an appraisal attached as an appendix to the complaint. The debtor did not respond to the Motion so BBT did not have to prove property value at an evidentiary hearing; the court entered a judgment based on the values alleged in the Motion.

Many of my clients over the past two or three years have been fearful of mortgage deficiency judgments because they had non-exempt assets with equity. These people believed that their relative wealth made them a target for a deficiency judgment. The BBT judgment does not support the theory that mortgage lenders will pick deficiency targets based on whom they believe own collectable assets. This particular debtor is insolvent; he has no non-exempt assets which makes bankruptcy the preferred solution to all his debt problems. This debtor was not targeted based on his net worth.

This case is significant because it shows that at least some lenders involved in some investment projects may pursue investors for individual liability. Whether mortgage lenders will begin pursuing mortgage deficiencies for loans made for primary residences, as opposed to investments, remains to be seen.

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

Protecting Consideration Received From Partner For Sale of Common Stock In Small Business

A man told me he is liable on several business loans and lines of credit. He is afraid that the bank may either call the loans or demand substantial principal reductions which he cannot afford to pay in today’s economy. He personally guaranteed all the business loans. The man owns 50% of the common stock in a profitable corporation. The corporation pays him a small salary and profit distributions. If a bank sues on any of his bank loans and gets a judgment against him the bank could then levy on the stock in his corporation. The non-debtor partner would be in business with the debtor's creditors. The man suggested selling his stock to his partner in consideration for a small cash down payment and a promissory note in order to get the stock out of his name. He intends to invest the cash in his homestead. His plan will not work as intended because the judgment creditor could garnish the note payable by the partner and demand payments from the partner.

A better solution would be to sell his stock to his business partner with different terms. First, he and partner should have the stock appraised by a business valuation expert. He can sell his stock to an "insider" provided he document the sale was made at reasonably equivalent value (not the same as fair market value). One option would be for the partner to form a new LLC and fund the LLC with the partner’s own money. The partner’s LLC would then contract with the debtor to buy his stock. Instead of paying with a promissory note the purchaser might give the debtor cash and membership interests in the new LLC, or some form of option to buy the LLC interests. LLC shares are better protected than common stock shares. Or, the LLC could provide consideration by hiring the debtor after the sale with a consulting or employment agreement for continued work on the company’s behalf. Salary paid by the LLC to the debtor would be exempt from the seller’s creditors if he is head of household (in this case, he supports his wife). The partner has a legitimate interest in purchasing the stock at below fair market value and structure the sale so that the non-debtor partner is not entangled in the debtor’s litigation. The debtor’s use of all cash received to reduce his homestead mortgage should be protected.

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

Retirment Money Exempt Three Years After Its Withdrawal From Plan

Several courts have sustained a debtor’s exemption of retirement fund proceeds deposited in a financial account even though the applicable exemption statute does not state that retirement proceeds are exempt after money is withdrawn from the debtor’s retirement plan. The annuity exemption statute specifically exempts annuities. Courts have read into the retirement fund exemption an protection of proceeds paid. One would expect that at some point in time money withdrawn from retirement and deposited for other use would eventually lose protection. Eventually, the exempt character of retirement distributions deposited or invested should transform to the debtor’s non-exempt assets. A recent bankruptcy case considered a debtor who withdrew retirement money in 2004, deposited the money in a financial account, and then in 2007 wrote a check from the same financial account payable to his attorney’s trust account for legal work to be performed on the debtor’s behalf. The bankruptcy trustee claimed that the money held on the debtor’s behalf in the trust account could not be exempt under the Florida Statute protecting retirement money.

The bankruptcy court held that the money in the attorney’s trust account was exempt under the retirement exemption statute. Even after four years, the debtor’s ability to trace the trust account money to withdrawals from a retirement account preserved his exemption. The court said that, "the circuitous, but traceable journal the Retirement Assets have taken over the past three years does not destroy their exempt status." The case is , In re Davis, 2009 WL 1080019, Case No 8:08-4348. This decision included an interesting discussion of homestead exemption which I will report in a subsequent blog post.

Homestead Occupancy: What It Takes To Make Land A Homestead

Many of my clients current live in another state and are considering moving to Florida for asset protection purposes. Almost everyone wants to know when homestead protection applies to a new Florida home they will buy. The general answer is that the owner has to actually live in the home as a permanent residence to make the house a Florida homestead. This past week a client posed a question regarding homestead occupancy which required I renew my research on the topic. Its not appropriate to repeat the exact question because my research is incomplete, but in the course of research, I found several cases (some old, some new) which expressed interesting principals about the occupancy of a new Florida homestead.

Here is a sample of principals of homestead occupancy (purposefully omitting case citations or facts):

1. A vacant lot cannot be homestead when the debtor intends to build a house on the lot even when the owner already placed building materials on the lot and has contracted with a builder (a debtor cannot occupy land without a structure thereon);

2. However, a homeowner can protect homestead land by erecting a tent on the lot, and living in the tent while the house is being built. In that case, the debtor prepared the house for occupancy, moved some belongings to the house, but lived in an apartment for a few days before moving in with his family. Living in a mobile home or a barn on the land pending home construction should also qualify;

3. Homestead protection attaches as soon as the owner purchases the house at closing even if he does not sleep in the house immediately thereafter;

4. The debtor does not have to occupy the house at all so long as it is occupied by members of his family as their principal residence. In this case, the debtor had moved out of state for a job and his family remained in the Florida home.

5. Occupancy does not have be to continuous. You can reside elsewhere part of the year, or you can live elsewhere indefinitely as long as you intend that your Florida residence is your primary home. As I have previously stated on this blog, Florida law does not impose a minimum number of days each year for residence in a Florida homestead.

These are just a sample of the many cases on homestead occupancy in order to illustrate that homestead protection is sometimes determined by the debtor’s particular facts.

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