Florida Asset Protection Blog

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

Beware Of Short Sales

Many people who invested in real estate at the end of the boom are in financial trouble. I have been getting more and more inquiries from individual investors facing foreclosures of their investment properties. Often, people tell me they are discussing “short sales” with their mortgage lenders. In a short sale, the lender allows the house to be sold for less than the mortgage balance. The borrower avoids a deficiency judgment. The lenders would rather get most of their mortgage through a sale arranged by the owner then take the property back at a foreclosure sale. Borrower should beware of short sales.

The problem for the borrower in a short sale is that the difference between the payment to the mortgage company and the full mortgage balance is a forgiveness of debt for tax purposes. The mortgage company is forgiving the debtor’s liability for the deficiency. The IRS considers forgiven debt to be taxable income to the borrower. The mortgage lender may send the borrower a Form 1099 for the amount of the deficiency. Most borrowers who cannot afford mortgage payments can even less afford additional tax liability. Owing money to the IRS is usually worse than owing money to a mortgage lender. Many mortgage lenders will not pursue debtors for deficiency judgments; the IRS will always pursue unpaid taxes. For that reason, most borrowers will fare better by letting their property go to foreclosure, even if the foreclosure may result in a deficiency liability.

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

Another Asset Freeze Stops Asset Protection Move

I’ve warned many times on this Blog that a court’s asset freeze can stop asset protection planning in its tracks. As a result, speed is essential when trouble first appears on the distant horizon. For instance, a debtor had his financial advisor call me several weeks ago from New Jersey to discuss asset protection options including buying a Florida homestead. There was a potential civil lawsuit in sight, but no lawsuit was anticipated in the near future. During the next three months the advisor called several times to schedule and reschedule consultations, each time asking a few preliminary questions about moving to Florida. Neither the client nor the advisor ever scheduled a consultation nor took any action on their own toward moving from New Jersey. This week the same advisor called again and said that while the client’s civil suit was the main issue, the client was also going through a divorce and the divorce court just issued an order prohibiting the sale or transfer of any of the client’s assets. The advisor asked if it was still possible for the client to sell the New Jersey home and buy a primary residence in Florida to protect the client from the potential civil suit. Its too late.

The general rule is that a debtor can protect money invested in a Florida homestead at any time, even after a suit is filed or a judgment is recorded. However, one cannot transfer money to a Florida homestead in violation of a court order or general asset freeze. In this case, the sale of the New Jersey residence and move to Florida would subject the debtor to sanctions for contempt of court. No attorney is going to assist with this course of action. Moving to Florida for asset protection purposes is a life changing decision which requires careful thought. Yet, some debtors do not have time for deliberation and analysis. In this instance, a person facing multiple legal problems delayed action several months until, in the end, his assets will be devoured by a former spouse and possible civil creditors as well.

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

Relying Upon Standard Business Forms in Asset Protection

A well- conceived asset protection plan can fail because attorneys use standard, off-the-shelf business forms to create legal entities to hold the debtor’s assets. Case in point is a case I worked on with a creditor’s attorney to penetrate a very complex asset protection plan involving domestic limited liability companies whose membership interests were owned by domestic trusts. The planning attorney used llc forms typically used for operating business and standard estate planning trust forms.

Standard llc forms and estate planning forms are designed to provide current income to the llc owners and trust beneficiaries. These typical forms often provide for mandatory distributions of all current income. In this instance, we convinced the trial judge to compel the llc manager and trustee of the trust to follow the terms of their documents and make current income distributions to the debtor and his family. We were then able to seize the llc required distributions with charging liens and garnishment proceedings.

Asset protection planning is customized. Each and every document must be carefully and intelligently drafted to maximize protection Many clients want legal work and documents to be simple and inexpensive. That approach often works in simple business arrangements; it usually does not provided effective asset protection.

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

Nevis LLC For Professionals

Interest in the Nevis LLC is increasing. I received an email from a physician who lives and is licensed in Florida. He wanted to know if he could establish a medical business through a Nevis LLC. Under Florida statute, any licensed professional business has to be designated as a professional corporation (a PA) or a professional limited liability company (PC or PL). Nevis has no statute permitting a professional LLC. Even if it did, I suspect Florida law requires that the PA or PL be Florida entities. Nevis LLCs have limits, and this is one of them. I do not think they are appropriate for a professional practice.

New Respect For Financial Products

I never stop learning about asset protection; I am always looking for new and better ways to protect people’s assets. This week I attended a meeting of a small number of nationally recognized financial professionals and tax attorneys as a guest of one of the member firms. The majority of attendees were nationally recognized financial planners who were top producers; the professionals at this conference service exclusively the wealthy and very wealthy.

At this conference I learned about several advanced level financial products that can be great asset protection tools. I have found that many asset protection clients reject financial protection tools because these tools are primarily insurance based. I had usually agreed with my clients that they should be suspect of insurance and annuity programs because someone was making a commission.

I have changed my mind. The cutting edge financial products include some very effective asset protection solutions. For instance, in many cases pledging non-exempt assets to finance premium payments can protect equity in these assets from creditors and also provide a good investment. To the extent a debtor client can show a credible financial benefit, premium financing should defeat fraudulent conveyance attacks.

Legal tools may not always be the exclusive asset protection solution. I came away from this meeting with the lesson that I and my future asset protection clients need to work more closely with sophisticated and experienced financial professionals. Don’t worry that someone may make a commission for providing effective solutions. Worry more about protecting the rest of your money from your enemies.

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

Can Parents Own Property With Child As Tenants By Entireties

The general rule is that property owned by a husband and wife as joint tenants with rights of survivorship is presumed to be a tenancy by the entireties (“TE”) which is protected from the individual debts of either spouse. I received an email question about a property owned by a husband, wife, and their child as joint tenants with rights of survivorship. The writer wanted to know if the property would be protected from one spouse’s creditor.

There is no tenancy by entireties ownership when a non-spouse is on title with survivorship rights. Tenancy by entireties is limited to property owned by married couples who meet certain ownership requirements. Therefore, a creditor could levy upon the debtor’s spouse’s interest. As there are three equal owners, the debtor’s interest is 1/3 of the property equity.

This family could have titled their property in a way which could have retained entireties protection. The parents could have owned their share as tenants by entireties and made their daughter a tenant in common for 1/3 or any other percentage of equity. The parents’ two-thirds interest in the property would be owned as TE property. The parents’ estate plan could have left their interest to the daughter upon their deaths, and the daughter could have bequeathed here interest to the parents, thereby accomplishing the same result as three-way survivorship but protecting the interest of the debtor parent.

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

Tenants By Entireties Offshore Accounts

A caller asked about whether a bank account owned by married Florida residents is exempt as tenants by entireties property if the account is in a foreign bank with no United States offices or branches

It may seem that bank accounts located outside the U.S. would not be subject to our exemption laws. However, the general rule is that exemptions of personal property, including financial accounts, is based on the law of the debtor’s residence. Certainly, a Florida husband and wife could maintain a protected tenants by entireties account at a New York financial institution. I do not know of any case that distinguishes foreign situs of financial accounts. Today, financial transactions are often international and Americans more frequently invest in foreign companies and bank instruments. I suspect that Florida courts would uphold the tenancy by entireties status of almost any bank account wherever located, although I am not aware of any case where the issue was addressed.

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

Protection From Self Settled Irrevocable Trust

A prospective client had established several years ago an irrevocable trust. The trust provided that all income be paid to the client, settlor, during his lifetime, and that upon his death the balance of trust property went to other named beneficiaries. The trust agreement had a spendthrift provision which says the settlor’s income interest could not be assigned or attacked by his creditors. The prospective client thought that his interest was protected because the trust was irrevocable and because of the spendthrift agreement. I advised him that this trust would not protect him from creditors and that it would not survive a bankruptcy.

This trust is a “self settled trust” because the settlor established the trust for his own benefit during his lifetime. Florida courts have held that spendthrift protection set forth in self-settled trusts is invalid against creditors. The courts have found that public policy prohibits debtors from putting money in a trust and retaining a beneficial interest in the money. That the trust is irrevocable, or that the ultimate beneficiaries are people other than the settlor, does not solve the problem. A creditor or bankruptcy trustee could take the settlor’s lifetime income interest. The income interest could be sold for its present value based on the settlor’s age and the amount of monthly income.

One solution would be for the trustee of the trust to invest all the trust property in an annuity which pays current income. The trust distributions would represent proceeds of an annuity which proceeds are exempt from creditors under Florida statutes.

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

Nevada Asset Protection Trusts

I recently had dinner with a well-known and extremely bright asset protection attorney from south Florida. Dinner conversation touched on the topic of domestic asset protection trusts. Domestic asset protection trusts (DAPT) are self-settled trust where the debtor is both settlor/trustmaker and the primary beneficiary. Domestic asset protection trusts set up in states which have enacted statutes to protect self-settled trust from attack by creditors of the settlor. Florida has no DAPT statute, and Florida courts have provided no asset protection to any self-settled trust.

I had never been a fan of DAPT planning because of a concern that Florida courts would not extend protection to a Florida debtor who was the beneficiary of a DAPT in favored states. However, my colleagues persuaded me to reconsider the benefits of a DAPT, especially a Nevada based DAPT. Nevada law provides may unique benefits to its asset protecton trusts. For example, the statute of limitations on fraudulent conveyance suits against transfers to a Nevada DAPT is only two years or six months after the conveyance is discovered. Nevada law specifically allows to debtor/settlor to have limited trustee powers including the retained power to invest trust assets. Powers to distribute trust property to the settlor/beneficiary is best left to an independent co-trustee. A Nevada trust, being domestic, provides greater sense of comfort and control than trust formed and operated in a foreign country.

No Florida court has yet ruled on the asset protection afforded by a Nevada DAPT, but my dinner colleague convinced me that in theory these trusts should be respected by Florida law. In any event, a Nevada DAPT is an asset protection alternative worth considering in complex asset protection situations.

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

Protection of Business Domain Names

Some types of personal property have little value to anyone except a debtor, but the property is extremely valuable to the debtor. Although the same property has little market value in the hands of a creditor, the creditor may still seek to levy on this unique personal property in order to pressure the debtor to pay all or part of a judgment.

An example I recently experienced was a client who ran a sales business primarily though the internet. The business had no inventory, and all sales were paid in advance so the business had no receivables. The business’s most valuable asset was the domain name of its website. If a creditor levied on the domain name the creditor could close the website and business would grind to a stop. Even though the website domain had little market value in the creditor’s hand it could be a primary target of collection efforts.

I suggested that this business sell the domain name to a related business entity and then lease the domain from the third party entity. In order to help deflect allegations of fraudulent conveyance I suggested that there be a purchase of the domain name for fair market value. An appraisal of the domain name would be helpful to establish an arms length sales price. Because the lease interest in the domain would also be an asset subject to levy, the lease should contain provisions that make it unattractive for creditors. In this type of web based business a the domain name is similar to the importance of an office building owned by a traditional business. These types of assets should not be titled in the name of operating companies that could incur future liabilities.

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

How Should Married People Own Property?

A few married people who are concerned about asset protection have asked whether it is better to hold property jointly as tenants by entireties or title property in the name of the one spouse least likely to be sued. Both forms of ownership are protected from creditors of the spouse most likely to become a judgment debtor. There are different consequences in the event the non-debtor spouse predeceases.

Upon the death of the non-debtor spouse the property owned tenants by entireties vest in the name of the surviving spouse where the property would be vulnerable to the surviving spouse’s individual creditors. The title conveyance is automatic and no probate is necessary. Tenants by entireties ownership is easy and inexpensive to establish without the assistance of an attorney.

If the non-debtor spouse owns property in their own name, rather than jointly with the debtor spouse, upon the death of the non-debtor spouse probate will likely be necessary. However, probate can be avoided if the non-debtor spouse leaves the property in trust for the debtor spouse and other heirs. The trust agreement could include “spendthrift provisions” which protects the property from the creditors of the surviving spouse and other heirs. Establishing such a trust requires the assistance of an estate planning attorney.

If either spouse is unlikely be sued then titling non-exempt property in their individual name is probably better asset protection provided there is also an effective estate plan. This issue illustrates how asset protection should be designed in conjunction with estate planning.

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

Trust Protector For A Living Trust

I read a living trust agreement which attempted to use a “trust protector” in addition to a trustee for reasons including asset protection. Trust protectors are common in offshore trust planning designed primarily for asset protection. Trust protectors are less common in living trusts designed usually for estate planning and probate avoidance. This particular trust agreement included a trust protector whose stated powers included transfer of assets owned by the living trust to any other trust created for the benefit of the living trust beneficiaries regardless of who created the other trust. For example, if the trustmaker’s parents or grandparents had themselves created an irrevocable or testamentary trust for the benefit of the settlor of the living trust, which other trust included asset protection provisions such as a spendthrift clause, the trust protector had the power to transfer all living trust assets to the other asset protection trust. Presumably, the maker of the living trust would argue that there was no fraudulent conveyance because the transfer was done by the trust protector without the consent or participation of the trustmaker.

I don’t know of any case which determined whether a conveyance by a trust protector of a living trust could be a fraudulent conveyance. In my opinion, this plan would not survive a creditor attack on the conveyance. The principal reason is that the office of trust protector and the appointment of the protector was made by the maker of the living trust for his own benefit. The trust protector is in a sense an agent of the trustmaker, and the actions of the trust protector would be deemed to be acts of the trustmaker. The plan might have a better chance if the trust protector’s conveyance to another trust was adverse to the interest of the trustmaker. However, most people would not have in a living trust a trust protector who had the ability to take actions with respect to the trust and trust property which were not in the interest of the trustmaker . In any event, the use of a trust protector in a living trust is a creative tool some asset protection to give a living trust which otherwise has no asset protection benefits.

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

Florida LLC vs. Nevada or Delaware

I received an email today from a blog reader who is interested in establishing a limited liability company for asset protection purposes. The reader suggested that Florida may not limit creditor remedies to charging liens against LLC interests and that Florida residents are better served by an LLC created in Nevada or Delaware.

In almost all cases, I find no advantage for Florida residents to filing an LLC in states other than Florida (with exception of Delaware series LLC in special cases). The Nevada and Delaware LLC laws are “sold” on the internet as asset protection tools, and many people have sought out these LLCs. The Florida statutes specifically provide LLCs the same asset protection as available to limited partnerships. People in Florida should not pay more money for an LLC located in any other state.

Big Law Firms Don't Do Asset Protection

Many of my clients own successful business and use large law firms for their business legal work. The clients often say that their big firm attorneys provide excellent advice about business planning and tax planning, but that they do not seem able or willing to provide help with their personal asset protection planning (which is why they seek help from me). I have talked to many “tall building” attorney about asset protection, and I find that most do not feel comfortable helping even their best individual clients in this area.

In my opinion, there are two principal rational explanations why big firms do not provide asset protection advice. First, big firms represent, or want to represent, banks, insurance companies, and other similar institutional clients who loan money and most often find themselves trying to collect money from debtors. Attorneys may feel that doing even a small amount of creditor protection work may antagonize these potential institutional clients. Second, there is case law in Florida that attorneys and other third parties cannot be held liable for assisting in what is later deemed a “fraudulent conveyance.” Other states do not have case law which is similarly protective of asset planning. In fact, there are cases in some states including California and New Jersey that have held attorneys liable for their clients’ fraudulent conveyances. If one attorney in a large firm is held liable, the entire firm may be held accountable. Therefore, attorneys around the country, in general, fear providing asset protection advice that involves transactions which could later be challenged under fraudulent conveyance law. Most Florida attorneys avoid asset protection because they believe, incorrectly, that they may be civilly liable for assisting with asset protection.

As a result, most asset protection attorneys practice by themselves or they are members of very small law firms. Business people who seek asset protection advice from their large business law firm are likely to get watered down legal advice that protects the law firm as much as it protect’s the client’s assets.

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

Living Trusts: Entireties and Fraudulent Conveyance Issues

A consultation today brought up an interesting issue about the effect of living trust estate planning on tenants by entireties and other asset protection issues. The client is a prospective defendant in a lawsuit. The client and wife have a joint living trust for which they are both trustees. The trust agreement divides their property between the husband’s trust share and the wife’s trust share. An appendix lists specific property in the husband’s share. We discussed the following issues. Is it possible to claim tenants by entireties to joint trust property where property is allocated within the trust to either spouse individually? I think probably not. In the event the husband and wife as trustees convey cash from the joint trust bank account to an account outside the trust titled husband and wife, when the trust’s cash account is specified as husband’s asset, is that a fraudulent conveyance from the husband to a joint account? Is the cash now jointly owned because it is in a joint trust account, or is it the husband’s property because the trust agreement allocates ownership to the husband? I think a creditor would have a valid argument, and the result is uncertain.

A consultation today brought up an interesting issue about the effect of living trust estate planning on tenants by entireties and other asset protection issues. The client is a prospective defendant in a lawsuit. The client and wife have a joint living trust for which they are both trustees. The trust agreement divides their property between the husband’s trust share and the wife’s trust share. An appendix lists specific property in the husband’s share. We discussed the following issues. Is it possible to claim tenants by entireties to joint trust property where property is allocated within the trust to either spouse individually? I think probably not. In the event the husband and wife as trustees convey cash from the joint trust bank account to an account outside the trust titled husband and wife, when the trust’s cash account is specified as husband’s asset, is that a fraudulent conveyance from the husband to a joint account? Is the cash now jointly owned because it is in a joint trust account, or is it the husband’s property because the trust agreement allocates ownership to the husband? I think a creditor would have a valid argument, and the result is uncertain.

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

LLC vs. Family Partnership: Best Asset Protection Tool

Family partnerships and limited liability companies have similar asset protection benefits for the owner who is, respectively, a partner or member. Florida statutes limit the creditor’s remedy to a charging lien against the debtor’s ownership interest. I am often asked which entity provides better asset protection. Sometimes people asks to compare a family limited partnership to an offshore LLC.

The best entity for asset protection depends on several factors that vary case by case. For an example, an individual business owner cannot transfer his business to a partnership unless he brings another owner into his business; a partnership requires at least two owners. If two businessmen own a business and one is in poor health a partnership may not be appropriate because if the ill owner dies there will only be one partner remaining . The partnership will dissolve unless the decedent’s shares pass to his heirs, but the other original owners may not want to be partners with heirs. The LLC offers flexibility to the extent it allows for one-person ownership.

On the other hand, partnerships have for a long time been used in estate planning to reduce estate taxation. Limited partnerships offer significant estate tax and income tax opportunities. For this reason, they may provide better protection against fraudulent conveyance allegations. If a debtor is asked why he transferred assets to a limited partnership, he could use estate tax advantages as a credible explanation rather than creditor protection. Estate planning motivation is harder to explain for transfers to limited liability companies, especially single member LLCs.

There are other contrasts between these asset protection tools. What is best for one person may not be the right choice for the next person.

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

Comment on Delaware LLC

I received an interesting comment about Delaware Series LLCs from a reader named David. I want to post the comment in its entirety because it is an interesting insight on the effective use of the Delaware LLC in asset protection planning:

At this point in time, you should use the Delaware Series LLC as a holding company. If you own stock, use a separate series for each different company stock you own. With regard to real estate, if you own real estate in California and place it in a Delaware Series LLC, it will still be under the jurisdiction of a California Court. And the California Court may not respect Delaware Law. So my point is simple, set up a brokerage account in Delaware, have a nominee officer from Delaware operate your business. If there is ever a lawsuit, your adversary would have to file a claim in Delaware. And I would bet you a million dollars that the Delaware Courts would uphold the statutes which make the Delaware Series LLC such a formidable asset protection tool. This is an asset protection tool which will provide maximum protection only when used properly. I wouldn't use it to hold it any real property outside of Delaware. This tool has its limitations. Respect those limitations and yo u shall be nicely rewarded. Don't "overuse" of over extend yourself with the Delaware Series LLC. Set it up such that it strictly does business in Delaware. The bottom line is if you get sued, you want to fight it out in Delaware!

I have previously commented that Delaware LLCs have not been approved by any Florida court to provide effective asset protection. David's comments shows how a Florida debtor could incorporate the Delaware LLC into an asset protection plan. Thanks for the comment.

Swiss Annuities

I have recently encountered significant discussion of Swiss annuities. One client asked me to research their effectiveness in asset protection; another client, a U.K. citizen, said that he already owned two Swiss annuities which he purchased in the U.K. I asked other attorneys if their clients had used Swiss annuities in asset protection. Attorney Alan Gassman, of Clearwater, Florida, a very good asset protection and tax attorney, said that two of his clients purchased Swiss annuities. Other asset protection attorneys, however, responded that they had no experience with these instruments

have not studied Swiss annuities in detail, but this is what I have heard from the above mentioned clients and from internet research. All annuities, domestic or foreign, are protected from creditors under Florida statutes, although annuities purchases may be reversed as fraudulent conversions for a period of four years. Swiss law provides additional protections including prohibiting the Swiss insurance company from complying with U.S. court orders. More specifically, if the owner makes an irrevocable beneficiary designation to an entity such as an estate planning vehicle or a child, Swiss law would prohibit the insurance company from changing the designation if ordered to do so by a U.S. bankruptcy court. Swiss fraudulent conveyance laws have a one year statute of limitations unless the creditor can show actual intent to defraud. Florida has a four year statute of limitations. In addition, under Swiss law the creditor must show that the annuity beneficiary as well as the debtor had intent to defraud to extend the Swiss limit beyond one year; a difficult standard where the beneficiary was a child or trustee of an estate planning trust.

Swiss annuities from reputable Swiss insurance companies may be promising asset protection tools. After additional study, I would like to add a page on my website to discuss these annuities in more detail. Comments would be appreciated from anyone with more experience with Swiss annuities.

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

Anti-Duress Clause in a LLC

I had set up a single member limited liability for a client to hold his investment assets. The client asked that the LLC appoint a friend as manager. The friend was appointment as manager so the client would not hold discretion to make distributions which could be subject to a charging lien. The LLC agreement gave the members (client) the right to replace the manager. The client asked if he should insert an anti-duress provision in the agreement which would say that the manager would not make distributions under duress. These anti-duress clauses are usually found in offshore trusts agreements to prevent the offshore trustee from complying with U.S. court orders. Sometimes they work; often they do not work. I don’t think they would work with a domestic LLC because the manager, if a U.S. resident, would comply with the court to protect himself from contempt regardless of the anti-duress language.

I told the client that the LLC “asset” which could be attacked by his creditor was his right to vote in the LLC, particularly, his right to replace the manager. A creditor could convince a court to levy upon the LLC member’s voting right when the creditor’s remedy was otherwise restricted by statute to a charging lien. The creditor could then exercise the voting right to appoint itself (the creditor) as manager, and then the new manager could make cash distributions which the creditor could get under the charging lien. I have not seen this creditor attack used in Florida, but I have read that it has been successfully tried in another state. To prevent this collection device, the client would have to give up the right to replace the manager. This means if the client were unhappy with how the chosen manager is running the LLC the client could not oust him. Most people do not want to give up this much control over their assets.

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