Florida Asset Protection Blog

Inherited IRAs Not Exempt- According To Florida Court Decision

IRA funds are exempt from creditors in and out of bankruptcy pursuant to the exemption in Florida Statute 222.21(a)- except if your "IRA" is inherited, according to a recent decision by a Florida appellate court. The case considered a judgment creditor’s claim against the debtor who had inherited  IRA funds from his deceased parent. The parent started the IRA and contributed pre-tax money during his lifetime. The court recognized that the parent’s IRA was exempt from the parent’s own creditors during the parent’s lifetime. When the parent died, the debtor/son had the option under the tax law to withdraw all of his parent’s IRA money over a five-yearperiod or  retain the money in what the IRS rules call an "inherited IRA." An inherited IRA is not subject to a five-year distribution rule, and it requires the debtor/son to take minimum distributions annually- the distributions could not be deferred.

The court found that the language of 222.21(a) does not apply to inherited IRAs because the statutory language refers to the "original fund or account" of the IRA. The court also noted that the tax consequences of inherited IRAs are significantly different because although there is no taxation until withdrawal the beneficiaries of inherited IRAs are required to take annual distributions. The court found that the public policy behind IRA exemption to allow debtors to preserve assets for their own retirement does not apply to the named beneficiaries after death. A surviving spouse’s rollover IRA is not affected by this court ruling and remains exempt under the Statute.

I assume the debtor’s counsel s for the benefit of debtors.. This court elected to strictly construe the statutory language to find that inherited IRAs are outside the intended statutory exemption. On the other hand, I recognize a strong policy argument supporting this court’s decision. The exemption laws protect debtors during their lifetimes and generally do not extend to their heirs. Inherited money or assets in most cases is not protected from the heirs’ creditors. For instance, when a parent dies leaving his exempt homestead to his children the property, or the sales proceeds, is not exempt from the children’s creditors unless the children occupy the house as their own homestead. I assume the court reasoned that the parent’s IRA funds should not be exempt from the beneficiary’s creditors just because the money is held in a fund called an "inherited IRA" which is different in character and purpose than the traditional, tax deferred IRA account described by the applicable statute.

No Florida bankruptcy court has dealt with the same issue.

I suspect most Florida residents assume that all IRAs- all funds that qualify as IRAs under IRS rules- are exempt. This is no longer the case. If you have an inherited IRA and are concerned about asset protection you should consider other asset protection tools to protect this money. Parents concerned about protecting their estate from their children’s creditors should get professional financial or legal advice to structure their IRAs so they will be protected after their deaths.

The case is 2D08-6428. Thanks to Jesse Toca for bringing this case to my attention.

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.

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

Does Contract To Sell Homestead Immediately Forfeit Creditor Protection?

A Florida resident's homestead is protected even if he is not residing the house temporarily as long as he intends to return the same property and considers the property to be his primary residence. If and when the facts indicate that the owner intends to abandon the homestead as a primary residence the homestead protection is lost. Abandonment is clear when the debtor sells the homestead property. A Florida bankruptcy court recently considered the question of whether a debtor shows his intent to abandon his homestead when he signs a contract to sell the property. A debtor executed a contract to sell, clearly intending and hoping to sell his homestead and then move, and prior to closing the sale the debtor filed bankruptcy.

The court held that contracting to sell a homestead is not the same as actually selling the property, and therefore, that the sales contract prior to closing does not constitute abandonment. The court cited prior Florida court decisions holding that homestead abandonment is usually shown by the debtor's acquisition of and move in to a new domicile or transfer by deed to a third party. As long as the debtor holds legal title and physically occupies a home the debtor is entitled to homestead protection from creditors and bankruptcy trustees. In re: Vick Case No. 07-10844

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

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Homestead Protection Of Property Owned In Name of A Partnership

A Florida bankruptcy court recently considered an interesting homestead issue. A debtor resided in a home titled in the name of a limited partnership. The limited partnership is owned primarily by a corporation which is 100% owned by the same debtor and occupant of the property. The debtor argued that although she does not hold legal title to the house in her name, she has an equitable interest in the property as its indirect owner, and that her equitable right to control the property is sufficient to protect the property under Florida’s homestead laws. The bankruptcy court ruled against the debtor and found that the property is not the debtor’s homestead because it is not owned by a natural person.

The same court noted that in some instances a debtor’s indirect equitable interest is sufficient to qualify a homestead property. He referred to a prior court decision holding that a trustee of a spendthrift trust for the beneficiary of the property’s resident could claim homestead on behalf of the trust beneficiary. (Case No. 01-bk-9988)

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

Debtor Inadvertently Forfeits Tenancy By Entireties Protection of Financial Acccount

Florida law is that personal property owned jointly by a husband and wife is presumed to be owned tenants by entireties and protected from the creditors of either spouse. Financial accounts, including bank accounts and securites accounts, titled jointly in the name of husband and wife are presumed to be entireties accounts. However, the presumption of entireties ownership can be rebutted where a creditor can show that the spouses disclaimed entireties ownership and chose another unprotected form of joint ownership. Spouse’s can forfeit protection if they are not careful when the open new financial accounts.

An example of lost entireties protection is found in a bankruptcy decision from 2007 where a trustee successfully attacked the debtor’s spouses securities account opened jointly by the debtor and the non-filing spouse. The new account form listed several forms of joint ownership including: joint tenants, tenants in common, tenants by entireties, and a minors custodial account. The married couple asked for a joint account, and the account application was presented with the box checked for joint tenants. Usually, under Florida law, joint tenant accounts are presumed to be entireties account. The court in this case held that because the tenancy by entireties option was offered on the account form and the spouses chose another form of joint ownership they had disclaimed, or refused, entireties ownership. The court was not convinced by the fact that almost all other titled marital property was specifically titled as tenancy by the entireties.

The case points out pitfalls that still exist under Florida law with respect to entireties ownership. Spouses must read all financial account application forms to see if tenancy by entireties is a listed ownership option. If it is, they must select the entireties option or risk losing the asset protection of the marital asset. The case is In re Mathews, 360 B.R. 732

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

Tenancy By Entireties Protection of Florida Real Estate Owned By Married Residents of Other States

I sometimes get calls from out of state clients who own Florida real estate and want to know if their real estate is protected from creditors. People who reside in another state cannot qualify for protection of a Florida property as their homestead because a protected homestead must be your primary residence. A more interesting question is whether Florida real estate owned jointly by a husband and wife residing outside of Florida is protected as tenants by entireties property. In other words, does the debtor and his spouse have to be Florida residents in order to have tenants by entireties property protected from the creditors of one or the other spouse?

The asset exemptions provided by the Florida Constitution and Florida Statutes are exclusively for Florida residents. Tenancy by the entirety protection is a creation of common law, ie., judicial decisions, and it is not an exemption provided by statute or constitution. There is no case law that reserves tenancy by the entireties protection of Florida assets only to Florida residents.

As a general principal of law, the common law exemptions applicable to real property is determined by the jurisdiction where the property is located. Whether a debtor can claim tenancy by entireties protection of Florida real estate is based on Florida law regardless of where the property owner maintains his primary residence. Therefore, Florida real property owned by married couples living in another state is protected by the creditors of either spouse under Florida’s common law protection of tenants by entireties property.

The analysis set forth above is consistent with the holding in a recent bankruptcy court decision. In re Cauley, 374 B.R. 311.

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

Entireties Account Protected Even Though Money Deposited By Debtor Spouse

As a general rule if spouse one, the debtor spouse, owns a non-exempt asset and conveys the asset to both spouses as tenants by entireties the transfer could be a fraudulent conveyance by the debtor spouse. A bankruptcy case dealt with the question in terms of the deposit into an entireties account of a tax refund when most of the refund was on account of income earned by the debtor spouse. The court said that the tax refund payable to both spouses is protected entireties money once it is deposited into the joint bank account

The court further explained that when only one spouse works and regularly deposits checks into an entireties account the money is exempt entireties funds when deposited. The court said, “ the same would be true if one spouse received a gift, won the lottery, or, here, possbily has a superior interest in a portion of a federal tax refund." 378 B.R. 371

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

Tenants By Entireties Of Money Held In Third Party Escrow Account

I came across an interesting case involving tenants by entireties. A husband and wife had an entireties account at their bank. They wanted to buy a parcel of real estate and title the property in the wife’s name. Normally, such transfer would not be a fraudulent transfer against either the husband’s or the wife’s individual creditors as the T by E account is exempt. The couple wrote a check from the entireties account to an escrow agent who was handling the real estate closing. They instructed the agent to hold the escrow as tenants by entireties money. The sale closed, and the escrow agent transferred the money to the seller. A creditor of the husband challenged the transaction as a fraudulent conveyance arguing that the money lost its entireties status when it was deposited in the bank account owned by the escrow agent.

The appellate court ruled there was no fraudulent conveyance. The money remained an entireties asset in the bank even though the interim bank account was owned by the escrow agent and not by the husband and wife. The court ruled that the husband and wife through their instructions to the escrow agent clearly intended the money to remain their entireties money when it left their entireties account to be held by the closing escrow agent. The case was decided by the 2nd DCA and is styled Snyder v. Dinardo.

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

Can Foreign Court Impose Equitable Lien or Constructive Trust On Florida Homestead?

I have previously written on this blog about out-of-state courts trying to stop debtors from evading money judgments by moving to Florida and buying a house. Judges in other states are issuing orders imposing an equitable lien or a constructive trust on the debtor’s Florida house in favor of the creditor on the theory that the debtor has “fraudulently” used money owed to the creditor to buy a Florida homestead. A recent opinion by a Florida bankruptcy judge explains Florida law’s requirements to impose a constructive trust and equitable lien on Florida real estate.

The Florida court pointed out that an equitable lien may be imposed only to capture money that was obtained through fraud or egregious conduct. The fact that money was rightfully obtained and then used for improper purpose is not enough to impose an equitable lien. The court points out that an equitable lien on homestead is not warranted when a debtor uses money lawfully obtained to buy an exempt asset for the purposes of avoiding and defrauding creditors.

A constructive trust requires the plaintiff to demonstrate four elements: a promise from defendant to plaintiff, a transfer of property based on the promise, a confidential relationship, and the defendant's unjust enrichment. These four elements are rarely found in a debtor's use of non-exempt assets to purchase a Florida homestead.

This ruling indicates that out-of-state court orders which attempt to impose an equitable lien or a constructive trust of recently acquired Florida homesteads will should not impair title to the debtor’s homestead absent a judgment based on common law fraud.

2006 WL 3913440

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