Florida Asset Protection Blog

Tax Reporting Requirements For Offshore Asset Protection

Many callers and clients express interest in offshore asset protection planning. I have prepared some offshore trusts and many offshore limited liability companies over time. Any type of offshore asset protection is complicated, in part, because of IRS reporting requirements applicable to foreign entities. I suspect there are many people with offshore asset protection entities who don't understand or comply with tax reporting rules. For example, a single member domestic limited liability company is by default a disregarded entity for tax purposes. This means the LLC on the entity level reports nothing to the IRS and is not required to get a separate tax number. The member treats the domestic LLC as a sole proprietorship for tax purposes. A single member foreign LLC established by a U.S. resident must file an election form 8832 to claim disregarded entity status. If it does not file this form timely the LLC may be treated as a C corporation and subject to corporate taxation. In addition, the offshore LLC once electing disregarded status must file information form 8858. Offshore entities taxed as partnership or corporation have different filing requirements.

Most people who create offshore entities cause the entity to maintain a bank account outside the U.S. These people are required to notify the IRS about offshore financial accounts withover $10,000 (aggregated)  by filing an IRS form TDF90-22.1. U.S. taxpayers must disclose all offshore financial accounts for which they have signatory authority, or for which they have control over a third party who has signatory authority, by filing the TDF90-22.1. For example, if you appoint someone to be a manager of your foreign LLC, and the manager maintains a financial account offshore, you must file this tax form. The TDF90-22 form is due on or before June 30^th, and there are no extensions. You can control an offshore account, but you must disclose it to the IRS. Offshore accounts also must be disclosed on your 1040 income tax return. Willful non-compliance is criminal.

If you are engaged in offshore asset protection you must consult with a CPA experienced in international tax or a tax attorney. The tax reporting requirements are one of the reasons I usually try to accomplish asset protection with domestic tools under Florida exemptions before recommending more sophisticated offshore entities.

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

Liability For Dog Bites

"Every dog is entitled to one bite." This saying refers to a legal tradition that a dog owner cannot foresee his dog is dangerous before the dog has actually bitten someone. The first dog bite puts the dog’s owner on notice to protect the public from his dog. Prior to the dog’s first bite, the tradition is that the dog’s owner cannot be held liable to foresee his dog’s poor behavior. Many people discount legal risk from their dog because they see their own dog as peaceful and well-behaved. People do not contemplate that their well-behaved dog could ever get them in legal problem prior to that "first bite." In Florida, the law is different. There are Florida statutes on dog liability that holds owners liable prior to the dog’s first bite.

Florida Statute 767.04 states that the owner of any dog that bites any person while the person is in a public place, or lawfully in a private space, is liable for damages of dog bits regardless of the former viciousness of the dog or the owners’ knowledge of such viciousness. If your dog bites, you pay. What makes matters worse is that many standard homeowner insurance policies and umbrella liability policies do not cover dog bites. Citizens Liability Insurance, the state insurance company, does not protect homeowners from liability on account of their pets. Check your liability policy.

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

Using Exculpatory Clauses To Limit Liability For Negligence

Some businesses try to limit negligence lawsuits associated with their services or products by having customers sign agreements with "exculpatory clauses." An exculpatory clause denies or limits the customer’s right to sue the business for the business’ own negligence. These clauses may influence some potential litigants to drop potential legal actions, but business owners should not rely fully on exculpatory clauses. Florida courts have viewed exculpatory clauses with suspicion and as being contrary to public policy. Courts have stated that they will consider exculpatory provisions only to the extent that their appeared to be a clear intention of both parties to relieve one party from liability and where the exculpatory language was clear and unequivocal. Also, exculpatory clauses can never insulate a business from willful, malicious or grossly negligent conduct which injures another person.

Homestead Protection Not Afforded To House Titled In A Family Partnership

Only individuals can claim homestead protection. The Florida Constitution states that homestead protection applies to "natural persons." I read a case this week wherein a debtor had transferred their homestead property to a family limited partnership for estate planning and estate tax purposes. The debtor owned 95% of the limited partnership interests, and there was a partnership agreement permitted the same debtor to reside in the house. The debtor claimed that the property should qualify as exempt homestead because he had the right to occupy the house under the terms of the partnership agreement. The debtor claimed that he had indirect equitable title to the property, and that his interest was sufficient to warrant homestead protection from his creditors.

The court denied homestead protection. The court recognized that several courts previously protected homestead properties owned in a occupant’s living trust. However, the debtor sets ups a living trust, is the lifetime beneficiary, and has the right to revoke the trust thereby returning property in personal title. In the case of this partnership, the debtor/partner was not the only person creating the partnership (there were other partners), and the debtor did not have the legal right to unilaterally revoke the partnership. The court pointed out that the "natural person" referred to in the Constitution is the legal owner and not the person with rights of occupancy. Other than using a living trust, Florida residents that title their residence in entities such as partnerships, limited liability companies, or irrevocable trusts will not have homestead protection from their creditors.

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

Court Protects Homestead Property Used For Debtor's Commercial Business

Homestead protection applies to homes and land occupied by a debtor as his primary residence. Property used for commercial purposes or for the production of income generally does not qualify for homestead protection. A Florida bankruptcy court recently considered married joint debtors who used part of a homestead property for his residence and part of the same property for business and income production. The issue was whether the partial business use disqualified all or part of the debtors’ homestead protection from their judgment creditors. The two debtors owned a five acre parcel of land in the county. They built their residence on a minority portion of the land. The debtors had two more buildings on the same land. One building was a warehouse used exclusively for the debtors’ business. The third building was a second residence rented to an unrelated third party. In other words, two of the three structures occupying most of the property were used commercially.

The bankruptcy court held that the entire land and all three structures were protected from the debtors’ creditors in his bankruptcy proceeding and were not subject to administration as part of the bankruptcy estate pursuant to the homestead exemption.. The court found that the Constitutional homestead clause does not disqualify a homestead because the owner uses the property commercially or for the production of rental income. The court said that, the "Debtors’ commercial use of the Building (rental) and the Warehouse does not preculd them from claiming the entirety of the Real Property as exempt." The court recognized that other bankruptcy courts reached opposite conclusions in earlier cases. The case is: In re: Earnest, Case No. 08-4408-3F7.

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

Lenders May Delay Condo Foreclosure To Avoid Paying Dues

Clients often ask me why it takes some banks so long to begin foreclosure on default loans. Part of the problem is backlog at the mortgage companies or their attorneys. Some banks are deliberately delaying foreclosures for reasons discussed this week in a Wall Street Journal article Condo Boards Take On Lenders . The article states points out that mortgage lenders are liable for unpaid condo dues when they take over the property after the foreclosure sale. In Florida, lenders are liable for as much as six months of late condo dues once they take title after foreclosure.  Some condo associations  are themselves foreclosing on bank owned condo units. The mortgage bank is being forced to pay accrued condo  fees in  order to hang on to the foreclosed property. The Journal article states that some mortgage lenders are delaying foreclosure to avoid HOA liability

Homeowner May Be Personally Liable For Code Violation Fines On Abandoned Residence

When homeowners decide to let their upside down properties go into foreclosure they typically stop caring for the properties physical condition. Repairs are deferred unless absolutely necessary. After a homeowner abandons his house, as is often the case in pending foreclosures, maintenance stops. Grass and weeds grow wild, electric service stops and air conditioning is turned off. Lack of grounds and building maintenance often results in violations of local building codes. Code violations can result in fines, and violations under Florida building codes often have daily penalties. A foreclosure and subsequent bank sale resolves many assessments against the foreclosed property including real estate taxes and association dues. Code enforcement fines are not necessarily solved by foreclosure.

Under Florida law, homeowners are personally liable for code enforcement fines. A homeowner who vacates his home prior to foreclosure may be exposing himself to personal liability to local government fines that follow the homeowner after the foreclosure sale. People do not want to spend money maintaining a home they are trying to give back to the bank. However, your home is your responsibility as long as legal title in your name. Allowing your home to become an eyesore will invite neighbor’s complaints, code enforcement actions, and expensive fines.

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

Creditor Rights To Attack Debtor's Charitable Gifts

You would think that people who donate substantial sums of money to charity would get a break when defending their charitable planning from judgment creditors. This past week a client asked me whether her creditors could attack a charitable trust she established. The debtor created the trust several years before she had any creditor problems, and the debtor was solvent at the time. The charitable trust was known as a "charitable remainder unitrust" under IRS regulations. The client donated marketable securities to the trust. When the debtor dies the trust will distribute all its property to a charity. During the debtor’s lifetime the trust pays the debtor an annual payment equal to 7 percent of trust value. The trust document contains a "spendthrift provision" which states that the trust’s payments to the client may not be assigned to her creditors. The client wanted to know if her judgment creditors can seize her annual payments or reverse the entire gift as a fraudulent transfer.

Florida law prohibits creditors from attaching payments to a debtor from a trust where the trust agreement has a spendthrift clause. However, there is an exception when the trust was established by the debtor- a so-called "self-settled trust." Courts have held that a spendthrift clause does not protect a debtor’s right to payment from a trust established by the debtor even when the trust is primarily for the benefit of a charity. A second issue is whether a creditor can reverse a charitable trust as a fraudulent transfer to avoid or delay creditors. If a debtor makes a charitable bequest of non-exempt assets to keep the assets away from his creditors the bequest could be subject to fraudulent transfer claims. A creditor could argue the debtor intended to benefit from an income tax deduction from the charitable gift rather the lose the money to the judgment creditor with no tax deduction ( assuming the debtor could not deduct the loss to the creditor). The new bankruptcy law enacted in 2005 specifically prohibited fraudulent transfer claims against charitable gifts. The bankruptcy provision is not applicable in state court fraudulent transfer claims.

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

Short Sale With BOA Is Bad Deal For Borrower

A couple consulted with me concerning a proposed short sale of an "upside down" investment property. They had give a purchase money first mortgage to Bank of America, and subsequently, borrowed additional money under a line of credit second mortgage from the same bank. A buyer had submitted a contract for about 90% of the first mortgage balance. BOA approved the short sale. They gave the borrowers a document to sign which said that BOA would release their two mortgage liens, but it did not state that the debt would be released. The bank told the borrowers that they had to speak with representatives of another department to discuss their personal liability after the short sale. The couple asked if they could speak with someone from the department about liability prior to signing the bank’s documents which would contractually obligate the borrowers to complete the short sale. They were told that they first must agree to the BOA short sale terms before the bank would discuss their personal liability.

The story is another example of why short sales are often not in the borrower’s best interest. The banks refusal to even discuss with the borrowers their personal liability after the short sale should be unacceptable to mortgage borrowers. I have stated before my opinion that short sales benefit banks and real estate agents more than they benefit borrowers. If you sign a short sale document presented by a mortgage lender in which you consent to personal liability after the short sale you have forfeited most of your defenses to a collection suit brought by your lender. I’ve heard from many clients that their real estate salesman and their bank representatives orally assured them that short sale documents with banks are a formality and that the bank will not sue after they get the proceeds of a short sale. These assurances are not legally binding and will not protect you in court. Most people should not agree to short sales unless the lender gives you a full release in exchange for finding a buyer for the distressed property.