Florida Asset Protection Blog

Tax Issue In Conversion of S-Corporation To Limited Liability Company

Limited liability companies are generally better asset protection entities than corporation. A judgment debtor can levy upon the debtor’s stock in a corporation and in the case of a small corporation possibly stop the corporation business and liquidate corporate assets. In the case of a debtor’s limited liability company interest the judgment creditor’s remedy is limited to a lien on distributions, if any, and the creditor cannot stop the LLC operations or force the sale of the LLC’s assets. In the past, the corporation, and particularly Sub-S corporations, were the most common business entity for closely held small business. When owners of small corporations become concerned about asset protection they often want to convert their S corporations to LLCs, possibly LLCs taxed as S corporations for tax purposes.

This past week one such corporation owner discussed with me the procedures to convert his profitable corporation to a limited liability company. Florida statutes provide a means to convert a domestic or out-of-state corporation to a Florida LLC. The issue we discussed was whether the conversion of a corporation would be treated for tax purposes as a liquidation and would accelerate the owner’s income tax liability.

To be sure, I forwarded the tax question to a local account named Lonnie Young. Lonnie has years of experience accounting for small business clients. He responded by email as follows:"

A conversion from S to an LLC can qualify as a tax-free reorganization under § 368-(a)(1)(F). In a Letter Ruling the basis and holding periods of the assets in new LLC are the same as in the prior Sub S. The S Corp status did not terminate as a result of the reorg since new LLC retained its S corp election and continued to meet S corp requirements per § 1361 (Ltr Rule 200528021).There will be issues if the ownership as a result of this re-org changes. Same owners, same percentages should not be a problem."

So, if a S Corporation owner wants to reorganize as an LLC taxed as an S corporation (by filing Form 8832) he should be able to do so without adverse tax effect as long as ownership does not change. I would be interested to know if the answer is the same if one spouse converts his S corporation to an LLC owned by the two spouses jointly when the spouses file joint tax returns- is this merger a change of ownership for tax purposes?

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

|Can Creditor Garnish Alimony And Support Payment Owed To Divorced Debtor?

I dealt with an interesting question today about alimony and support questions. Sometimes people ask me if there are asset protection tools to guard against awards for payment of alimony or support (generally, the answer is "no") or what types of assets are vulnerable to enforce family court judgments. Today’s issue was different. A divorced woman was facing a large civil judgment. The divorce court awarded the woman alimony, and her ex-husband sent her monthly alimony checks. The woman depended upon the alimony to pay her basic costs of living. She wanted to know if a judgment creditor could garnish the alimony payments from the ex-husband.

Florida statute Chapter 222 which lists the asset exemptions applicable to Florida residents does not include an exemption for alimony or support. There is no exemption in the Florida constitution nor under federal law. Florida courts, however, have protected alimony and support from garnishment. One court held that alimony was not the type of debt or obligation subject to garnishment, and that public policy calls for the protection of alimony and support. See Waters 547 So 2d 197 . At least one bankruptcy court recognized this garnishment exemption.

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

Deed From Husband To Himself And Wife Creates Entireties Ownership Per Florida Statute

Tenancy by entireties ownership requires certain characteristics. One requirement is that husband and wife must acquire their interest in the entireties asset simultaneously. For instance, suppose a single man has a bank account. He gets married, and after marriage he adds his wife’s name to the account as a co-owner (not just an authorized signer). The account is not an entireties account because the husband and wife acquired their interests in the account at a different time and the man opened the account before being married. This week I encountered an exception to the rule about simultaneous ownership of entireties property. In this instance, my client purchased primary residence when he was single. After marriage deeded the property from his name to him and his wife jointly. The property exceeded ½ acre within a city so did not qualify for homestead protection. The issue was whether the residence could be considered a tenancy by entireties asset when the husband and wife did not acquire their interest at the same time in the same deed.

Florida statutes provide an exception to simultaneous title in the case of married persons owning real property as tenants by entireties. Florida Statute 689.11 provides that if one spouse owns a property in his own name and conveys the property by deed to both spouses the conveyance creates an estate by the entirety. Prior to the enactment of this statute an individual owner of homestead or other real property would have to convey the property to an unrelated third party and then have the intervening owner make a separate deed to the spouses jointly in order to establish entireties ownership of the property. In my client’s case his deed to his wife created ownership by the entireties, and his homestead would be thereafter protected from his individual creditors even if it was not fully protected under the homestead umbrella.

Tenants By Entireties Does Not Depend Upon Florida Residency

"Assets owned jointly by married Florida residents is exempt from the individual judgment creditors of either spouse because the joint assets are owned tenants by the entireties." Most people consider the foregoing sentence to be a correct principal of Florida law. The sentence is true, but it is also misleading. The issue is that the quote suggests that tenancy by entireties is an "exemption" applicable to "Florida residents" and the quote does not consider the nature or location of property in question. Actually, tenants by entireties is not a Florida creditor "exemption." Florida exemptions from creditor levy and in bankruptcy proceedings are set forth in Chapter 222 of Florida statutes. These statutory exemptions are applicable only to Florida residents. Tenancy by the entireties is not a statutory exemption; is a principal established by the traditions of Florida case law. Florida residency is not a prerequisite for tenants by entireties protection. More specifically, you do not have to be a Florida resident to enjoy the protection of jointly owned real property (land) or tangible personal property under the entireties umbrella if the same assets are situated in the state of Florida.

Consider, for example, a married couple residing in Georgia and owning jointly a parcel of real property in Florida. A judgment creditor of either spouse cannot levy on the Florida real estate owned by the Georgians because it is owned by the entireties under Florida’s property laws. A Florida married couple cannot protect as entireties property jointly owned real property situated in Georgia because Georgia property law does not recognize T by E. However, if the same Florida couple has a joint stock account or a partnership interest (or other intangible personal property) at a New York brokerage house the account may be protected from either spouse’s creditors because the law applicable to intangible personal property is the law of the debtor’s residence (Florida). The law applicable to physical assets (such as automobiles and boats) is the law where the asset is situated. Florida married residents cannot protect under the T by E umbrella a boat docked in Georgia.

To understand tenancy by the entireties you must understand that T by E is not truly an "exemption" created by Florida statutes for the exclusive benefit of Florida residents.

Size Of Municipal Homestead Lot Partly Under Water

Your house in a municipality is homestead provided the lot is no larger than ½ acre. If the city homestead lot is greater than ½ acre the protection is applied pro rata. For example, for a lot 1 acre in size within a city only 50% of the equity is protected as homestead. This week I spoke with a man who lived on a lake front lot in the city. The lot was barely over ½ acre. The lot survey showed that the side lot lines extended several feet into the lake so that a significant part of the lot was under the lake. The dry land was less than ½ acre in size. The man asked me if the part of the lot under the lake counted toward the calculation of his homestead exemption.

I have never seen this issue, and I’m not aware of any judicial decision dealing with the issue. My sense is that the land under the lake which is part of the lot’s legal description counts in the homestead calculation so that a portion of his equity is not homestead protected. I am not aware of any legal authority that a debtor can deduct from the acreage calculation parts of his residential lot that is not usable for some reason. If a portion of a city lot could not be used for building because it was wetlands, for example, I do not think the debtor could deduct the wetlands from the lot size to fall within the ½ acre limit.

This man could ask a surveyor to segregate the dry land and the wet part of the lot on a new survey. He could then create an entity (LLC, partnership etc) and deed the land under the lake to the separate entity. This conveyance may increase real estate taxation, and it could bring objections from a homeowners association. Local laws which prohibited subdivision of the lot may not become a practical problem since he would not build on the conveyed lake property. Even though there could be legal issues, the conveyance would be of record, and it would prevent, or at least make more difficult, the forced sale of the homestead by a judgment creditor.

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

Finding An Offshore Bank For Your Asset Protection Plan

Foreign bank accounts are an integral part of offshore asset protection. Clients who establish limited liability companies or corporations in foreign jurisdictions for asset protection frequent ask where and how their entities can set up a foreign bank account. This past week I visited an executive manager of a well-established offshore trust company that assists asset protection for U.S. citizens. The company serves as manager of foreign LLCs or as trustee of foreign trusts. The manager told me that the offshore banking environment has changed significantly in the past year or two as the IRS has cracked down on banks that have maintained secret bank accounts for U.S. taxpayers.

Because of the IRS tax scrutiny, U.S. clients seeking offshore asset protection are finding it more difficult to open bank accounts. This offshore trust company I met with has always recommended that their clients’ asset protection entities use Swiss banks, not the banks in Caribbean or central America where their offshore asset protection entities have been formed. In the past year or two the better known and largest Swiss banks have made it very difficult for U.S. citizens to maintain bank accounts in their own name or through their offshore asset protection companies. These Swiss banks have become wary of accepting any clients who might bring IRS scrutiny. There are, however, still banking opportunities in Swiss banks for asset protection entities. The person I met with has had success referring his clients to smaller Swiss banks that specialize in private banking relationships. For example, he mentioned that he has had good results with private banks such as Bank Sarasin & Cie, AG and Lombard Odier bank. He mentioned other banks as well that solicit U.S. clients.

I have not had any experience with and cannot recommend any Swiss banks. Each person interested in offshore asset protection must do reasonable due diligence of any bank involved in his asset protection plan. Remember always that offshore banking for asset protection has no income tax advantages, and instead, may require additional tax reporting to the IRS.

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