Florida Asset Protection Blog

Update: Overpaying Taxes To Protect Money From Judgment Creditors

I have recently posted blog articles about a client who is trying to protect money from a judgment creditor by overpaying estimated taxes to the IRS, and when a refund is due from the next tax return, asking the IRS to hold his refund to pay future taxes. I had mentioned that an experienced collection attorney I consulted had no idea how he could attack a debtor’s excess tax deposits with the IRS. Another collection attorney in Florida emailed his suggestion that the creditor could seek proceedings supplementary with a Florida court and ask the judge to use the broad equitable powers granted courts by the relevant statute to command the IRS to turn over the debtor’s tax deposits to the court. A bankruptcy professor did not know the answer and suggested speaking with a tax attorney, which I did.

This week I presented to issue to Mr. Robert Kramer who is a very experienced and well known tax attorney in Broward County, Florida, where he heads his own firm, Kramer, Green, Zuckerman et. al. Robert Kramer has been a tax attorney for several decades and has also provided asset protection planning for many physician clients. Robert said that a general judgment creditor cannot garnish the IRS to collect a civil judgment in the absences of specific statutory authority; such authority exists, for example, for collection of state child support awards. Also, Robert stated that a state court judge cannot enforce an order against the IRS for turnover of taxpayer money to collect a civil judgment because the state court judge lacks federal jurisdiction, and there are no federal statutes giving such power to state courts to collect general civil judgments. In other words, the Florida judgment creditor may have no remedy to get money the debtor transfers to the IRS to avoid his creditors.

No doubt, the excessive payment to IRS to avoid paying judgment creditors is a fraudulent transfer or fraudulent conversion. A creditor’s lawsuit to recover a fraudulent transfer would name the debtor and the IRS as defendants. The judgment creditor would have to sue the IRS (probably in federal court), and even if he could prove the debtor’s intent to evade collection, the civil judgment creditor may be without a remedy to get the money. Sometimes the simple asset protection plans that do not work legally are very effective practically.

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

Client Overpays Estimated Taxes Used To Shield Money From Potential Creditors In IRS Account

Often new clients describe asset protection tools they implemented before they first meet me. Their asset protection solutions are usually based on a book they read, a seminar they attended, or even things they read on my own website. Usually, the client’s asset protection strategies will not work because they lack knowledge or experience with important issues, but sometimes I meet people whose own asset protection plan includes creative and possibly effective strategies. As an example, last week a new client described to me how he has already protected approximately $75,000 of cash by overpaying his estimated tax payments. His IRS account showed a positive and refundable balance of $75,000. The client assumed his creditors could neither discovery nor recover his money held by the IRS. At first, I told the client his plan would not work because his credit with the IRS was a non-exempt asset and would have to be disclosed. But upon further investigation, his ploy may be effective.

First, the IRS credit would have to be revealed to a judgment creditor who could examine the client about all assets in a deposition under oath. In a bankruptcy proceeding, I have no doubt that the bankruptcy trustee would demand the client ask the IRS for the money and upon receipt turn over the money to the trustee. A bankruptcy court would enforce the trustee’s turnover request with its contempt power. Outside of a bankruptcy proceeding it may be difficult for a creditor to recover the money.

A judgment creditor outside of bankruptcy needs to use available tools of collection to get a debtor’s non-exempt assets. The creditor can’t simply demand payment; he must recover the judgment using appropriate legal and equitable remedies. An overpayment to the IRS is a non-exempt asset. The question is how does a creditor get the money from the IRS; what is the appropriate collection tool?

I posed this question to a prominent and very experienced collection attorney in Orlando, Fl. He wrote back that he did not know whether there is a tool by which a creditor could attack a debtor’s IRS deposits. His response, paraphrased is, he did notknow whether a creditor can garnish the IRS for money owed by the IRS. He could not can’t find anything that permits it, and therefore, he thought it possible that a judgment creditor cannot reach it. The collection attorney said he searched Westlaw and Google and could not find an appropriate remedy to reach the deposit. He told me that even if there is a way to get the money the remedy would be very difficult for the creditor.

This is not the first time a client has asked me about the protection of IRS overpayments outside of bankruptcy. If a reader knows the appropriate creditor remedy to levy upon the IRS money please send me an email. Even though an IRS overpayment is not exempt, and may be deemed a fraudulent transfer to hinder or delay creditors, it still may be an asset protection device if creditors do not have a cost-effective tool to recover the funds.

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.

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

Don't Try To Use Fake Documents For Asset Protection

People facing possible judgments that jeopardize their wealth are often in desperate situations; desperate people sometimes do desperate things to protect themselves. When people consult attorneys about asset protection they sometimes find that they do not have available the best legal documents to substantiate exempt ownership or to protect their business LLC or corporations. Later, the client reports that the correct documents have “been found” in their business or personal papers. Sometimes existing documents are actually found, but sometimes non-existing documents are manufactured and back-dated. I heard of a case this week where a “found” document lead to severe adverse consequences in litigation.

Someone told me a story about a person who was defendant in a complicated civil litigation case. His defense rested on letters he had sent the opposing party and corporate documents related to the business transaction underlying the suit. The defendant produced copies of these documents and signed an affidavit that the copies were true and correct copies of original document previously sent to the plaintiff. The plaintiff said he never saw or received the defendants document.

This was a large case and the plaintiff was well-funded. The plaintiff hire a document expert who examined the document copies using modern instruments. The expert found without a doubt that the defendants documents were fake, having been manufactured at a date significantly later than the dates shown on the documents.

As a result of the defendant’s false sworn statement the defendant’s defense was discredited and the court awarded the plaintiff a large money judgment. Criminal action for perjury may follow for filing a false affidavit for the purpose of defrauding the court. .

I have said many times on this blog that two of the most important principles of asset protection are, one, there are no secrets, and two, debtors should never underestimate their creditors. Admittedly, most people who falsify documents in the legal system get away with it. However, as technology advances more and more cheaters will get caught, and if you get caught, the consequences may be worse than loss of a few non-exempt assets. There are enough legitimate asset protection tools under Florida law so that most people can protect themselves honestly and securing if they plan ahead. My advice is simple: start early so you are not tempted to lie or cheat.

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

Why Won't Mortgage Company Negotiate With Me?

At least once a day someone calls me about problems they face paying one or mortgages on their Florida real estate. Many people ask if I could assist them, or at least advise them, in negotiating a work out agreement with their lenders. They assume their lenders will realize that it is better for the lender to adjust their mortgage payment schedule than to force the borrower into foreclosure. The unfortunate fact is that as a practical matter very few lenders will work out customized deal with mortgage borrowers. Some lenders will accept short sales for borrowers already in default, but otherwise, most lenders will not deal with borrowers individual financial situations and modification requests. The main reason for lender inflexibility was expressed in a Wall Street Journal article written by economist Martin Feldstein

The article appearing in the March 7, 2008 Journal stated,

“Most mortgages are no longer held by originating lenders, but are securitized and sold to investors world-wide. More significant, mortgages are used to create complex, asset-backed securities that are cental to current credit-market problems. Investors no long own specific mortgages but only have rights to certain conditional payment streams. So generally, it is no longer possible to prevent foreclosures by negotiations between borrowers and lenders”

In other words, you can’t negotiate adjustments to your mortgage payment and terms because there is no one to negotiate with. For the same reason, there is no one in charge of pursuing deficiency judgments. The best approach for most people who find themselves hopelessly behind their upside-down mortgages is simply send in the keys and walk away.

posted by Jonathan Alper, asset protection and estate planning attorney, Orlando, Florida

Tax Trap From Foreclosure of Investment Property

I saw an email about income tax liability associated with foreclosure or bankruptcy sent by attorney Larry Heinkel. The email addresses income tax liability from the foreclosure of properties which have previously been depreciated for tax purposes. Most people know that if a bank forgives part of a mortgage loan in the course of a short sale or deed in lieu that the amount of debt forgiveness may be taxable if the mortgaged property is an investment or second home. A new law has eliminated debt forgiveness tax for principal residences. A person who is insolvent at time of short sale or deed in lieu, or who files bankruptcy, has no liability for debt forgiveness taxation. Mr. Heinkel points out a different tax trap.

If the debtor has previously depreciated the property for income tax purposes the tax basis of the property has been lowered from its original purchase price. The short sale or deed in lieu may be treated as a “sale or exchange” which triggers income tax on the difference between the property value and the adjusted basis. This tax liability is not eliminated by insolvency or bankruptcy. People considering walking away from investment property should check with their CPA to see if they may incur tax liability by the recapture of prior tax depreciation.

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

Hidden Risk In Asset Protection Of Real Estate

A real estate attorney alerted me to pitfalls in changing legal title to real property in the course of asset protection planning. To better protect real property from future creditors, many clients have told me that they have conveyed real estate that they purchased in their individual names to limited liability companies, corporations, or partnerships. Most often, people use quit claim deeds to make the conveyance. If a creditor records a certified copy of judgment against an individual that judgment becomes a lien on all real property titled in the debtor’s individual name. The conveyance to another legal entity protects against the immediate lien on the real property, subject to any creditor argument of fraudulent conveyance. In general, such conveyance to entities from individual names is a good asset protection strategy. Yet, this attorney told me there are risks.

When the individual first purchases real estate in his own name he typically buys a title insurance policy insuring the individual against defects in legal ownership. The individual purchaser is the insured party. When individual owners convey real property to an LLC or corporation they rarely extend the title insurance to the new entity owner. If they encounter a title problem when they sell the property the title insurance company can deny coverage to the entity owner because they are not named insured parties. The transfer for asset protection could forfeit valuable title insurance. A possible solution is a conveyance by warranty deed so that the individual guarantees good title to the entity, and in the event of a subsequent title problem, the individual grantor may have insurance coverage for his warranty of title. The potential issue illustrates the complexity of asset protection planning.

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

Protection Of Valuable Personal Property

Valuable personal property owned free and clear is difficult to protect from creditors. Consider, for example, my client who owned outright a private airplane. The client was unmarried and owned all assets in his individual name. The client had imminent legal problems so that any transfer of the airplane title would probably be deemed a fraudulent conveyance. One option was for the client to pledge the airplane for a bank loan. That option had two problems. First, my client did not have good credit and a loan secured by the airplane alone would be difficult and expensive. Secondly, he did not want to pay interest on a personal property loan and he had no place to shelter the loan proceeds if he did get the loan.

His main asset protection tool was to be the purchase of a new homestead and getting a home equity line of credit to borrow money for living expenses.

My client decided to pursue a combination of his home equity loan and a loan secured by the plane. He intends to propose that his bank cross-collateralize a line of credit on his house with a lien on his airplane. This solution would not incur interest costs over and above his home equity loan. He would not have excess loan proceeds to protect as borrowed funds would be spent as needed for expenses. It will be interesting to see if this client encounters problems in structuring a real estate mortgage cross-collateralized with a lien on his airplane.

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

Pitfalls Of LLC Asset Protection

Many investors in assets such as rental real estate or small operating business buy their investments or run their businesses though a limited liability company because unlike shares of corporation, the owners membership interest in an LLC cannot be levied upon by judgment creditors. The judgment creditors’ remedy is limited to a charging lien against distributions of cash, if any, that the LLC makes to its owners. I met with some people today who asked questions about the benefits of an LLC which questions indicated common misunderstandings about the LLC’s asset protection benefits. I’ll address each of the points raised by my client about he and some partners owning rental real estate in an LLC with several owners.

First, an LLC provides no asset protection against lawsuits brought against the LLC. For instance, if you own a parcel of rental real estate in an LLC and one of your tenants, or a guest on the property, brings a lawsuit against the LLC as the property owner, the LLC will not protect the property. If the plaintiff gets a judgment against the LLC the plaintiff can levy upon the property and foreclose the property to satisfy the judgment.

Second, if there is a judgment against one of several LLC members from a lawsuit brought against the owner individually, not against the LLC, the LLC cannot avoid a charging lien against the debtor owner by withholding distributions if at the same time the LLC distributes cash to the other non-debtor owners. Most LLC agreements require equal and pro-rata distributions among members.

Third, the client wanted to know if he could avoid charging liens by having his LLC pay money not to him, the owner, but directly to the bank who holds the mortgage on his personal residence. This too is a bad idea. Paying personal expenses directly from an LLC or a corporation is a prime basis by which a creditor could argue that the business entity is merely the alter-ego of the owner and not a separate legal entity. If the LLC is deemed to be the owner’s alter-ego the creditor can “pierce the veil” of the LLC in which case the creditor holding a judgment against the individual could directly attack the assets of the alter-ego LLC. Do not pay personal expenses directly from your LLC or corporate checking accounts. Have the business pay you money, and then you can pay your expenses.

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