Florida Asset Protection Blog

Bank of America Gets Tough on Credit Card Payments

People who bank at Bank of America and who have credit cards through the same bank are having problems when they don’t pay credit card payments. Bank of America, more than most banks, is enforcing a provision in their credit card agreements which allows them to take money out of customers’ bank accounts to pay the credit card. They are taking money without any advance notice. No client has asked me to review their Bank of American credit card documents, so I am assuming the bank has a legal contractual basis for their practice.

If you bank at Bank of American and have their Visa or Mastercard cards, and if think you may fall behind on credit card payments, you should consider moving your checking account to another bank. Even if you leave open the BOA checking account, open an account somewhere else and move most of your money. I don’t know if other banks have the same rights in their customer agreements. If you bank somewhere else you should find out whether your bank can automatically deduct credit card payments from your accounts at the same bank.

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

Tenancy By Entireties Property In Other States: Sometimes Exempt And Sometimes Not Exempt

Under Florida law tenants by entireties property is exempt from a creditor’s claim against either spouse individually. Prior entries on this blog have explained that tenancy by entireties is not a statutory exemption. Technically, tenants by entireties property is not “exempt” from creditors because it is not one of the bankruptcy exemptions listed in the Florida statutes. Instead, tenancy by entireties is a concept and an immunity created by the common law of Florida court decisions. Sometimes I have consulted with clients who currently reside in other states but are considering moving to Florida. These clients often tell me they own property in their current residence jointly with their spouse, and they want to know if the property is protected. The answer depends on whether the courts of their current residence protect tenants by entireties property from levy and execution. The answer can be tricky in some states.

For example, one client told me he owned real property as tenants by entireties in another state. I did some preliminary research which indicated that the client’s residence recognized tenants by entireties ownership. However, I had difficulty finding bankruptcy cases upholding the exclusion of entireties property from debtors’ bankruptcy estates in that same state. In a subsequent conference with the same client and his personal attorney in his home town the attorney told me that his state did recognize ownership of real property by the entireties, but that state’s courts refused to exempt the property from levy and execution. The client’s property was owned by the entireties but it was not exempt.

If this client moved to Florida his real estate in his previous home state would not be exempt because the exemption of real estate is determined by the laws of the state where the real estate is situated.

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

Mortgage Deficiency: Update On Tax Consquences

Mortgage deficiency judgments are main reason people express currently for seeking my asset protection advice. I have previously written on this Blog that most lenders do not pursue mortgage deficiencies and some of the reasons for this policy. I just recently spoke with an attorney who represents many mortgage lenders. He said that lenders continue to be inundated with foreclosures and are having difficulty managing the cases. None of the lenders he works for are pursuing deficiency judgments as a matter of course. Many lenders are planning to send 1099 tax forms to borrowers. The lenders file and send the 1099 forms to document their own tax loss. The borrower who receives a 1099 from a foreclosure must deal with its income tax consequences.

I have previously explained in prior Blog posts that borrowers can escape income tax liability associated with foreclosures, deeds in lieu of foreclosure, or short sales by filing a report of insolvency with the IRS. Most people lose properties because the mortgage debt exceeds property value, and the borrowers does not have enough other assets to continue mortgage payments. Most of these borrowers are insolvent. Also, anyone who files bankruptcy is presumed to be insolvent for tax purposes.

To be sure, borrowers concerned about tax consequences of mortgage foreclosure should consult with their CPA. The effect of receiving a 1099 from a mortgage lender is mostly a tax issue rather than a legal issue.

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

Head Of Household Affidavit And Wage Garnishment

Creditors cannot garnish wages of a debtor who is head of household in Florida. I am occasionally asked, as I was this week, whether someone who is facing a possible judgment from a court proceeding needs to file in the same court an affidavit that he his head of household in order to claim the exemption. The answer is “no.” The law does not require such affidavit, and moreover, filing a affidavit will not suffice to protect wages from attempted garnishment.

Head of household status is usually asserted after a judgment creditor has served a writ of wage garnishment on your employer. When a debtor receives notice of a garnishment the debtor can assert on the garnishment form his head of household exemption and file the claim of exemption with the court. The law directs courts to hold immediate hearings on the exemption claim so that protected debtors are not unreasonably inconvenienced.

Rather than file an affidavit in advance of garnishment I sometimes advise debtors who have had a judgment entered against them to take affirmative steps to notify the judgment creditor of the debtor’s garnishment exemptions before the creditor obtains and serves a writ. The debtor should provide the creditor supporting evidence of his exemption. In the case of head of household, the debtor could provide pay stubs of the debtor and his dependants. Most debtors will not attempt garnishment if they believe the debtor’s wages are exempt for fear of a wrongful garnishment action by the debtor.

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

Wage Garnishment: Can Debtor Claim Head of Household Exemption in Advance of Garnishment

Some people have sent me emails asking how they can assert an exemption of their salary on the basis that they are head of household. Usually, these questions are sent by debtors owe money for general consumer debts such as credit cards or car repossessions. The readers typically want to know what they have to do to let their creditors know in advance that their wages are exempt from garnishment.

Florida law does not provide a procedure to register an asset exemption in advance of a judgment, with the exception of filing for the Constitutional homestead exemption. A creditor can try to garnish wages only after the creditor gets a court judgment. When the creditor serves a writ of garnishment on the employer the debtor/employee gets a notification on which he can assert an exemption. If the debtor believes he is head of household he states the exemption on the form and sends copies to the court and the creditor. The debtor is entitled to an expedited hearing to dissolve the garnishment at which he has to prove to the judge that he qualifies as head of household.

If a debtor is certain that he is head of a household and anticipates a judgment against him, the debtor or his attorney could write a letter to creditor asserting wage garnishment exemption and providing proof of head of household status. The advance letter could in some cases convince the creditor not to pursue wage garnishment.

Asset Protection Using Reciprocal Irrevocable Trusts

One of my new clients told me about an asset protection tool he implemented upon the advice of another attorney. The attorney had told him the protection was “ironclad.” I disagree. The client and his girlfriend each established an irrevocable trust for the benefit of one another. The trusts were identical, and each person funded the trust with the same amount of money. The trust documents had spendthrift provisions which prohibit a creditor from levying upon the interest of the respective beneficiaries. Each person served as trustee of their own trust and had the discretion, but not the requirement, to make distributions of income or principal.

I think a court would find that the debtor’s transfer of money into a trust for the benefit of his girlfriend is a fraudulent conveyance where the girlfriend had made a reciprocal transfer into trust. The debtor’s “gift” to the girlfriend was conditioned upon her reciprocal gift. In effect, the debtor received access through his girlfriends trust to the same amount of money he conveyed out of his name. There is no actual, irrevocable gift where the gift is conditioned or matched by a gift back. I don’t know of any court decision on this fact pattern. I think a court would rule that the debtor’s conveyance was to what is in effect a self-settled trust.

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

Avoiding Wage Garnishment In A Closely Held Small Business

Unmarried debtors who do not support minor children or a spouse are not exempt from wage garnishment. Where such debtor is involved in a closely held small business there may be planning opportunities to protect from garnishment periodic receipts from the business. Small business can pay some of its key personnel either as salaried employees or as independent contractors. The payment method and employment characterization of the key employee may have income tax consequences, and it may also affect the protection of compensation from judgment creditors.

Salary paid to an employee and periodic payments to an independent contractor are both subject to garnishment by the judgment creditor. The difference is that Florida law permits a continuing writ of garnishment of salary. By serving the initial writ of garnishment on a small business employer, the creditor gets a perpetual garnishment of all future salary payments. Florida law does not permit continuing writs of garnishment of payment to independent contractors. So, if a small business pays its key employee as an independent contractor a judgment creditor of same key employee would have to obtain separate writs of garnishment each time the employer was to make payment. It would be very difficult for the creditor to anticipate payments to the independent contractor and to serve a writ prior to each payment.

Therefore, a debtor who is not head of household is better off being compensated as an independent contractor rather than as a salaried employee.

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

Tips To Document Gambling Losses

I don’t gamble. Some of my clients who do gamble are facing civil judgments and are concerned about vulnerability of cash in their financial accounts. One such client recently returned from a Las Vegas on a gambling trip and reported that he lost most of the cash he had before the trip. I asked the client how he expected to prove that cash in his account before the trip to Vegas was no longer in his possession and in the possession of Las Vegas casinos.

First this client explained that he had receipts for airfare and several days of hotel bills. Second, he told me that the Las Vegas casinos allow its customers to enroll in clubs or frequent gambler programs. Enrollees receive a card which they can swipe at the gambling tables or at slot machines. The client told me that gambling club members who spend sufficient time at the gambling tables are eligible for upgrades and complimentary services. The gambling card also further documents that the gambler spent sufficient time at the casino be consistent with his claims of money lost. If you plan to go to Las Vegas, Atlantic City, or elsewhere in an attempt to win enough money to pay your creditors, if my client is correct, enrollment in a casino program that documents your gambling activity is a good idea in the event you lose your cash.

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

Friends And Family In Florida Asset Protection Planning

Many clients believe that their family members and friends can be part of their asset protection plan. This week one of my clients consulted with me about whether his interest in a wholly owned limited liability company business would be an effective defense against a possible civil judgment against the client for actions unrelated to the operation of the business. The client understood that the creditors’s collection remedy against his interest in the LLC would be limited to a charging lien on distributions from the LLC to the client/owner. However, the client was concerned about not being able to receive money earned by the LLC which the client had relied upon to pay personal expenses. The client made several proposals and suggestions about how his friends and family could help him receive money from his limited liability company. These suggestions included, for example, the LLC paying salary to a friend and having the friend pay his personal bills; borrowing money from a family member secured by a lien on LLC distributions but then paying back the loan in cash; selling his LLC interest to a friend for nominal consideration with an unwritten understanding that the client was entitled to profits and loans from the LLC etc, etc.

Friends and family are not asset protection tools. It is almost always a bad idea to base an asset protection plan on your trust in your friends and family. The well-intentioned help from those closest to you, and from people you most trust, usually has unintended poor consequences for all involved. Any fraudulent conveyance actions will name the cooperating friend or family member as a defendant. Your asset protection plan will drag your friend or family member into your legal problems and require them to get their own attorney to protect their interest. The creditor has the right to question under oath anyone who is involved in your business or financial picture. When placed under oath your best friends and favorite family member will likely choose to tell the truth rather than commit perjury. Although initially cooperative, these people will ultimately undo the asset protection plans to protect their own family financial interest. In Florida, there are usually effective asset protection strategies that do not rely on other people, especially those people whom you care for.

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

Income Tax Liaibility From Deed In Lieu Or Short Sale

Many real estate investors have serious financial problems due to declining real estate values and credit problems. During the past few months a large portion of my banrkuptcy and asset protection inquiries are from people who find themselves unable to pay mortgages they used to buy investment real estate near the end of the housing bubble. Several of my callers, and people who have become clients, have asked me about the consequences of giving a bank a deed in lieu of foreclosure or selling the property for less than full mortgage balance as part of an agreed “short sale.” (A “short sale” is where the bank agrees to accept less than the mortgage balance to release the mortgage in order to facilitate a sale and partial recovery of the loan). One issue that frequently is discussed is the income tax consequences for the borrower from a short sale of deed in lieu as opposed to letting the bank foreclose. Income tax may be imposed for a cancellation of a debt. (“COD”) I am not an income tax professional. Recently, I posed the question to my personal CPA, Mr. Lonnie Young of Lake Mary, Florida, and asked him to explain the income tax consequences of giving property back to a mortgage lender.

Mr. Young responded that the borrower does not recognize income tax for COD from a foreclosure, but there is addtional income tax liability from either a short sale or a deed in lieu of foreclosure which results in COD. He sent me a passage from one of his CPA tax books pertaining to the issue, which information I am quoting below for everyone’s benefit.

Why is it that I may have both gain (or loss) and COD income upon foreclosure of my house?

In many home foreclosures, the mortgage debt is recourse and the fair market value (FMV) of the house is less than the unpaid face amount of the debt. Often in this situation the borrower/debtor transfers the house to the lender (or to a third party), either through a deed in lieu of foreclosure or as a result of a foreclosure proceeding. This transfer is treated as a sale or other disposition of the property and results in the borrower/transferor realizing gain or loss. At the time of the transfer, the lender often cancels the remaining mortgage debt, leading to COD income.

Different rules may apply if the mortgage debt is nonrecourse.

What is COD income, and how is it calculated?

Loan proceeds are not included in income when received because there is an offsetting obligation to repay. However, if the debt is cancelled in part or full in a foreclosure proceeding, you will have COD income equaling the difference between the unpaid amount of the debt and the FMV of the property you transfer to the lender or a third party to discharge that debt. For example, if your debt prior to foreclosure was $200,000 and the FMV of the property was $170,000, you would have $30,000 of COD income.

Note: If you borrow money from a friend or relative and he or she cancels all or part of the debt, the cancellation often is treated as a gift from the lender to you. Gifts, including gifts of cancelled debts, are excludible from income. However, the cancellation of debt by a commercial lender is not a gift.

Can the amount of COD income be affected by other liabilities relating to the property?

The existence of other liabilities, such as property taxes, can either increase or reduce the amount of your COD income. For example, there may be unpaid property taxes that are treated as imposed on you for federal tax purposes. If you have not provided funds to pay the property taxes, the taxes generally either remain as unpaid charges against the property after foreclosure or must be satisfied from the sales proceeds from the foreclosed property prior to any application of such proceeds to satisfaction of the debt. The unpaid liabilities reduce the amount of the FMV of the property that is available for satisfaction of the debt and must be taken into account in computing the amount of COD income.

For example, suppose your debt prior to foreclosure was $200,000 and the FMV of the property was $170,000, but you had $10,000 of unpaid property taxes. In this situation, because the FMV of the property available to satisfy the debt would be only $160,000 ($170,000 FMV less $10,000 unpaid taxes), the COD income would be $40,000 ($200,000 debt less $160,000 FMV).

On the other hand, if you pay property taxes that for federal income tax purposes are treated as imposed on the owner of the property, this may reduce the amount of your cancelled debt income. Thus, if you paid $10,000 of property taxes that for federal income tax purposes are imposed on the owner of the property after the foreclosure, your FMV would be $180,000 ($170,000 plus $10,000) and your COD income would be $20,000 ($200,000 debt less $180,000 FMV).

How do I compute gain or loss on a disposition by foreclosure?

Gain or loss is the difference between your amount realized and your adjusted basis in the property. In general, an amount realized by the transferor on a foreclosure or other transfer of property is the sum of:(1) the amount of money received; (2) the FMV of any other property received; and (3) the amount of any other liabilities that the transferee (the person acquiring the property) either assumes or takes the property subject to.

Give an example involving recourse debt in which both gain and COD income results on the foreclosure.

If the face amount of the recourse debt is $200,000, the FMV of the property is $170,000, and the adjusted basis is $120,000, you have $30,000 of COD income ($200,000 debt less $170,000 FMV) and $50,000 of gain ($170,000 FMV (amount realized) less $120,000 adjusted basis).

If the mortgage debt is nonrecourse, is there COD income on the foreclosure?

If your mortgage debt is nonrecourse, the debt is greater than the FMV of the house, and the house is foreclosed upon, your amount realized will be the face amount of the unpaid mortgage debt. Thus, if the amount of the nonrecourse debt is $200,000, the FMV of the property is $170,000, and the adjusted basis of the property is $120,000, your gain on foreclosure is $80,000 ($200,000 amount realized less $120,000 adjusted basis). No portion of the gain on property subject only to nonrecourse debt is COD income.

If your house is foreclosed upon and your mortgage debt is recourse, are there circumstances in which you may have gain or loss but not COD income?

There are at least two situations involving recourse debt in which foreclosure results in gain or loss, but not in COD income.

First, sometimes when a house is transferred to the lender by foreclosure the lender does not cancel the remaining unpaid portion of the debt. This could happen if the lender believes it can still collect the balance of the debt. In that circumstance, you would not have COD income until the lender discharged the debt or the statute of limitations on collection of the debt expired. The gain or loss on the foreclosure is the difference between the FMV of the property and its adjusted basis.

Second, sometimes the FMV of a house that is foreclosed upon is greater than the amount of the debt. If the FMV is sufficient to pay the debt in full, the debt is satisfied and there is no COD income because no part of the debt was discharged or cancelled. For example, if the FMV of the house was $200,000, the amount of the debt was $140,000, and the adjusted basis of the house was $110,000, the gain on the sale of the house is $90,000 ($200,000 FMV (amount realized) less $110,000 adjusted basis), but there is no COD income because the FMV of the house is $60,000 ($200,000 FMV less $140,000 debt), which is more than enough to satisfy the debt in full.

Can COD income ever be excluded from my gross income?

You may be able to exclude all or part of the cancelled debt income if all or part of the debt was discharged in bankruptcy, if you were insolvent immediately before the transfer, or if the debt is a qualified farm debt or qualified real property indebtedness. Refer to Publication 908 (PDF),Bankruptcy Tax Guide.

How do I report COD income on my return?

COD income is ordinary income and is reported on Line 21 of your return.

Can gain on the foreclosure of my house be excluded from my gross income?

If the house is your principal residence, you may be able to exclude part of all of the gain under I.R.C. 121. See Publication 523, Selling Your Home.

How do I report a foreclosure gain or loss on my return?

Gain or loss on the foreclosure of your house usually is capital gain or loss. However, a loss on the foreclosure of your residence is not deductible. Capital gains are reported on Form 1040, Schedule D (PDF). If, however, the gain on the foreclosure of your residence is excluded under I.R.C. 121, you are not required to report the gain on your return.

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

Debtor Pre-Paying His Attorney's Legal Fees

My clients often suggest asset protection techniques that appear clever and effective at first glance, but will not work against an experienced creditor attorney. One such idea is for the debtor to pay his civil litigation attorneys large sums of money in advance of legal services defending the creditor's collection efforts. The theory is that the debtor's money is protected in their attorney’s hands under some variation of attorney-client protections. Another reason for this plan is to make sure the debtor can fund his legal defense against collection efforts. This plan is built on incorrect assumptions and will not protect the debtor’s money against a skilled collection attorney

Attorney client privilege is an evidentiary rule that protects your communications with your attorney and documents you provide to your attorney. Attorney client privilege does not protect money you give your attorney. Money held by your attorney in his trust account, or even in his operating account, which money the attorney is authorized to apply to future bills as services are provided is your (the client’s) money until it is earned. A judgment creditor can serve a writ of garnishment upon the debtor’s attorney. All of the debtor’s funds held by the attorney which have not been earned by the attorney for services rendered are subject to the writ of garnishment. After the writ is served the attorney cannot use the debtor’s funds to pay legal bills and cannot return the funds to the debtor/client. A writ of garnishment served on the debt
or’s attorney are effective creditor tool to make it difficult for the debtor to pay for his legal defense.

The debtor's alternative is to pre-pay his attorney under an arrangement whereby all money paid the attorney is non-refundable whether or not legal services are provided. Non-refundable fees should be considered to be the attorney's asset.

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

How To Free Trapped Profits From A Professional LLC

I often get asked how a licensed professional with a money judgment entered against him can get money out of his professional business. If the professional is head of household he can exempt and protect salary paid him from his own business (subject to some conditions). If the professional’s business is a professional limited liability company then his creditor cannot levy upon profits, after salary, which are retained in the business, but the creditor could get a charging lien on any profit distributions made from the professional business to the owner. For tax purposes, many professionals would prefer to pay themselves in profit distributions rather than salary, yet with a charging lien profits would be trapped inside the llc.

If the LLC were owned not by the professional debtor but by his spouse or by he and his spouse as tenants by entireties then the ownership interest would be exempt from this individual creditors and there could be no charging lien. However, in Florida, many professions (including attorneys) must own their businesses in their own name. They cannot hold membership interest in the name of their spouses.

An attorney I know contacted me with his thoughts concerning “trapped profits” in a judgment debtor’s professional limited liability company. He suggested that a professional llc owned individually by the professional could free profits trapped by a charging lien by overpaying income tax withholding and quarterly estimated to the IRS. Assuming the professional judgment debtor is married and files a joint tax return, the IRS would the following year issue a large tax refund to the debtor and his wife jointly as they had filed a joint return. The refund check payable to the debtor and his wife would appear to be exempt from the individual’s creditors as tenancy by entireties property. The money could be deposited into the couples protected joint bank account.

Technically, this device is a fraudulent transfer from the debtor’s business to he and his wife. The tax refund although payable to husband and wife actually represents a refund of the debtor’s payments to the IRS from the earnings of his solely owned business. Yet, in practice, only an unusually skilled and persistent creditor attorney would figure out the nature of the tax refund.

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

Bank Acounts to Avoid Probate: POD vs. ITF accounts

I received an interesting question about the difference for asset protection purposes between bank accounts titled “ITF”, or in trust for, and bank accounts titled “POD”, pay on death. An example of each account title would be as follows: “John ITF Mary” and John POD Mary. Both accounts are set up by John and funded with John’s money. In both cases, when John dies all the money in the accounts passes to Mary outside of any probate of John’s estate. The writer reported that one Florida bank permits only ITF accounts whereas a different Florida bank uses only POD accounts. Does the choice of these two titles make any difference in terms of protecting the money from John’s creditors during his lifetime.

Here's my understanding, although I know of no cases comparing the two types of accounts. . ITF , “in trust for” implies the existence of a trust relationship so that the beneficiary of the trust (Mary) would have equitable ownership in the account funds from the day John funds the account. . Of John opened a POD accoutn, Mary would have no rights or interest in the account during John’s life, and Mary would first acquire an interest upon John’s death. From an asset protection standpoint, John is a trustee over Mary’s money during his life in the case of an ITF account, and John has no equitable ownership in the money which would be vulnerable to his creditors. Creation of the ITF account is an immediate gift in trust to Mary. If John’s POD account John has a life estate in the account and the beneficiary has a remainder interest. During his lifetime John has full access to money in his POD account; Mary’s interest is limited to what is left in the POD account upon John’s death.. Because John can access for his own use money in a POD account during his lifetime I expect that John’s creditors could attack money his POD account as they can get whatever rights John has in the POD account. For that reason, I believe an ITF account provides better asset protection as well as probate avoidance.

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

Is Parent Liable For Accidents of His Adult Child?

No matter how much I think I know about asset protection there is always some new risk of liability that surprises me. A client called me about his car insurance. The client had a child in college in another state. The child had a drivers license in the other state and not in Florida. The same child owned a car in the child’s own name. The child had his own car insurance with minimum liability coverage as the parent/client believed liability coverage was not important for a child with no assets. The client’s insurance agent said that his own $1m umbrella policy would not cover him unless the child raised his insurance liability limits or the child were insured under the parent’s own policy with high liability limits. This seemed illogical because the child was an adult and his ownership and operation of the car was in a totally different part of the country.

I checked the issue with two insurance agents I know in Orlando. Both told me that there is established legal decisions which can make a parent liable for the accidents of his adult child as long as the child is a legal dependent and is claimed as a tax dependent on the parent’s tax return. So, even if you are not on the title to your child’s car, and the child had his own insurance, you still could be liable for his accidents if he is your legal dependant.

Both insurance agents said that the client should raise the liability limits on his child’s separate insurance to match the parents’ liability levels in order to bring the child under the parents’ umbrella liability policy. Not knowing anything about insurance laws, I was very surprised to find another example of how creative plaintiff’s attorneys are able to convince judges to make tap into deep pocket defendants.

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

Timing Annuity and Homestead Purchase Before Moving to Florida

An individual currently resides in a state outside of Florida where he is facing a potential large lawsuit from a business transaction. The individual is considering moving to Florida, purchasing a Florida homestead, and investing cash in annuities which are protected from creditors by Florida statutes. His current state of residence does not afford sufficient protection of either homesteads or annuities. The question posed is the timing of purchasing the annuity and the homestead relative to the time of his move to Florida

The answers depend in large part upon the vulnerability of his purchase of a homestead and an annuity to a creditor’s fraudulent conveyance attacks. Under Florida law homestead is not subject to fraudulent conveyance attack with narrow exceptions. The purchase of an annuity with non-exempt money may be set aside as a fraudulent transfer or conversion under applicable Florida statutes.

I suggested to this individual that he could wait to purchase the homestead until after he made a final decision to move to Florida, even if the move is not made until the time of a judgment. I suggested that he should purchase annuities now if annuities fit with his personal financial planning. Because the annuities are not exempt assets in his current State residence, the annuity purchase should not be considered a fraudulent conversion because it is not a conveyance of money to an exempt asset. Fraudulent conveyance actions are based on the debtor’s intent at the time of the conveyance. At this time, purchasing an annuity does not protect the individual’s assets, and therefore, his intent logically is not to hinder or delay future creditors. Nevertheless, if the individual were to become a Florida resident in the future Florida’s laws would apply to debt collection, so that his previously purchased annuities should be protected. There is no court case that holds that someone’s moving to Florida could be considered a “fraudulent move” subjecting the person’s assets to creditor attack.

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

Fraud Liability For Financial Statements

A client had been sued by bank for default under business promissory note. He stated he was concerned that when he got the loan he submitted to the bank a financial statement that exaggerated his assets. He fears that the creditor will prosecute him for fraud because he submitted a false financial statement to procure a loan. In this case, the loan was secured by collateral.

In most cases, filing an exaggerated financial statement will not result in lenders bringing fraud charges. One reason is that the lenders rely on other than personal financial statements when they evaluate loan request. For example, a lender typically will rely on a borrower’s credit score, this banking relationship, and most important, the security for the loan. I believe most people discount the value of financial statements because they are self-serving and biased in favor of the borrower. An action for fraud requires proof of may legal elements including the creditor’s reasonable reliance on an intentional misrepresentation and damages as a result of the reliance. When a lender relies on factors such as security or credit scores it may be difficult for the lender that the borrower’s financial statement was a material reason for making a loan. Also, the lender has the opportunity to request documentation for a financial statement, and if the lender fails to do so, he legally may have waived an argument that the financial statement was material.

I do not mean to suggest that borrower have freedom to intentionally make gross exaggerations of their assets on financial statements. Where there is a clear intent to deceive a lender by making up assets a court will more likely receive the creditor’s allegation of fraudulent misrepresentation. Relatively small overstatements of assets typically do not expose the borrower to fraud actions.

My advice has always been to understate your assets on financial statements. If your credit is good and security is ample you will get the loan you request. A bloated financial statement will be hard to explain in the event you default on a loan and the creditor is attacking your assets as listed on your financial statement.

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

Finding Good Asset Protection Help

People living in states other than Florida occasionally ask for my help in finding asset protection advice in their state. Its not easy. Generally, larger law firms are reluctant to provide asset protection planning for several reasons that I have discussed in previous posts. Attorneys working in asset protection are concentrated in a few states including New York, California, and Florida (because of Florida’s liberal homestead laws). People in lesser populated states and in states whose laws provide fewer asset protection options will find it more difficult to get asset protection advice.

As an example, I received a call today from a physician in a southern state who was being sued for events unrelated to the practice of medicine. He said he had been receiving contradictory advice; some of the advice seemed incorrect. The physician had no desire to move to Florida. I told him I was unable to provide advice about his situation under the laws of his state. He asked how he could get competent legal advice where he lived.

I suggested that he stop looking for advice in the larger firms and instead seek “second opinions” for smaller law practices or solo specialist. If people are unable to locate attorneys who specialize in asset protection per se the next best source of advice is from bankruptcy attorneys who represent primarily debtors. Bankruptcy attorneys are sources of information because they understand and have experience with exemption laws of their states. They are also experienced in fraudulent conveyance issues which are usually the most important issues in asset protection. The shortcoming of the typical bankruptcy attorney is in the areas of tax and estate planning. Asset protection plans often have income tax or estate planning ramifications. If you seek asset protection guidance from an attorney specialize in bankruptcy make sure you review his suggestions with your CPA, or if your business is complicated, with a tax attorney.

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

Affidavits For Florida Asset Protection

A reader was confused about the various affidavits that debtors may need to file in Florida such as the homestead affidavit, head of household affidavit, and affidavits of domicile. A homestead affidavit may be required to qualify for the homestead tax exemption. The homestead affidavit must be filed after you move into your residence prior to January 1 because real estate taxes are based on January 1 tax value and homestead status. That affidavit is not required for homestead asset protection.

Your homestead is protected as long as you own and reside in the property as your primary residence regardless of filing affidavits. The affidavit for domicile is provided under Florida statutes to give notice of Florida residency. This affidavit is neither necessary nor determinative. Filing an affidavit of domicile does not make you a Florida resident if Florida is not actually your primary home. The affidavit of domicile can be filed at any time. A head of household affidavit is filed as a defense to wage garnishment. Wages of a head of household cannot be garnished under Florida statutes. This affidavit is not filed until after a creditor has served a writ of garnishment on your employer. The debtor may have to prove facts that support head of household status.

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

Homestead Or Annuity Purchase After Lawsuit

A reader asked whether it matters if he purchases a Florida homestead or a Florida annuity before being served with a lawsuit, and whether he could purchase these assets even after a judgment is entered against him. The answer is much different for an annuity and a homestead. The purchase of an annuity is subject to challenge as a fraudulent conversion of assets if the annuity is purchased any time within the four year statute of limitations. The closer the annuity purchase is in time to the lawsuit, the harder it would be for the debtor to defend a fraudulent conversion action after judgment. An annuity purchase after judgment, or even after service of a lawsuit, would be very difficult to defend unless the purchase has clear and strong financial advantage.

Homestead purchases are subject to different rules. I have discussed many times on this blog that under ruling of the Florida Supreme Court a homestead purchase, including payment toward the mortgage on an older house, is mostly exempt from fraudulent conveyance attack. In the case of homestead, it generally will not make any difference if this reader invested money in a Florida homestead after being served with a lawsuit.

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

Tenancy By Entireties Protection of Property Outside of Florida

A husband and wife own an investment real property in Florida as joint tenants with rights of survivorship and a vacation home in Tennessee also titled as husband and wife, tenants with survivorship. Both spouses are Florida residents. Florida law, generally, is that all property owned by married couples as joint tenants with rights of survivorship are presumed to be owned by the entireties. Entireties property is immune from the individual creditors of either spouse. The married couple they presumed both properties are protected from a judgment against the husband only. I advised them that the Florida property is protected, but that the creditor can force the sale of the Tennessee vacation home and claim 50% of the net sale proceeds.

The exemption law applicable to real property are the law of the state where the real property is located regardless of the residence of the debtor who owns the property. In this instance, the Florida property’s exemption is under Florida law and the Tennessee property’s exemption is under Tennessee law. When I researched Tennessee law I found their law on entireties much different than Florida. There are cases in Tennessee which hold that a conveyance of real property to husband and wife is presumed to be owned by the entireties unless there is contrary evidence of intent on the instrument itself. Applied to this example, a deed to husband and wife expressly as joint tenants would defeat the entireties presumption in Tennessee. I also saw Tennessee case which said that state that entireties ownership consist of two distinct interests: a present right of possession and a separate survivorship interest. The right of possession is protected from creditors whereas the creditor can levy on the survivorship right.

I am not qualified to interpret Tennessee law, especially as to complex issues like tenancy by entireties presumptions. The point is that if a Florida debtor owns real property in other states he should consult an attorney in the state where to property is situation to determine its protection from creditors. Do not assume that just because you are a Florida resident you can transport Florida’s asset protection laws to other states where you may own an interest in real property.

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

A Different Equity Stripping Plan

Equity stripping involves encumbering equity in an asset such as real estate or receivables in order to secure a loan. In some instances equity stripping may not be available because, for instance, the assets sought to be protected are not acceptable to lending institutions as collateral or the debtor’s credit does not warrant a loan regardless of the nature of collateral offered. Another problem with standard equity pledging is that the loan proceeds received become a pot of non-exempt cash in the debtor’s hands. One of my existing clients presented an interesting variation of equity stripping protection that could work in some otherwise difficult situations.

The client’s idea was for him and an associate to create a new business in the form of a limited liability company. The business could be an operating business or an investment enterprise. The business agreement would require each of the partners to guarantee a substantial amount of future capital contributions. To secure their future capital contributions the debtor and his associate each pledge non-exempt assets to the business entity and file a UCC-1. If the business entity can demonstrate validity, and if the parties demonstrate bona fide consideration for the pledge to make capital contributions, the proposed arrangement could effectively protect equity in the assets pledged. The debtor/client does not receive non-exempt cash in return for the asset pledge which cash would create a new asset protection challenge. Instead, the client gets only a LLC membership interest which is somewhat protected from judgment creditors by virtue of the limited charging lien remedy provided by Florida law.

I am not aware of any court decision concerning the validity and asset protection of a lien on non-exempt assets to secure a future capital contributions. As in the case of most asset protection tools, this solution works to the extent of its underlying business validity.

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

Protection of Inheritance

A person with creditor problems or a money judgment against himself may feel “lucky” if a relative dies and leaves him an inheritance. Yet, the inheritance is an asset as soon as it is determined by a court, or pursuant to a living trust, that the debtor has a beneficial interest. If money is distributed from the decedent to the beneficiary the money is even more accessible to creditors. If the debtor accepts the inheritance and then transfers the money to another non-debtor family member or to a protected asset, such as an annuity, that transfer will be attacked as a fraudulent conveyance subject to reversal. The best situation would be if the decedent had made a bequest to his heirs or beneficiaries in a trust for their benefit rather than outright distributions, assuming the trust document had proper spendthrift language to provide creditor insulation. Unfortunately, the decedent himself usually does not have asset protection concerns at the time the testamentary will or trust is created, and protection of the inheritance from the creditors of one or more of his heirs is not an important estate planning motive.

One of the most important tools of asset protection planning is involving parents or grandparents in your asset protection plan by encouraging them to leave your inheritance in protective trust. The heir with asset protection concerns must take responsibility for this part of family planning. For the heir or beneficiary, a bequest in trust with liberal distribution instructions provides nearly unrestricted use of the inheritance yet protects inheritances from judgments. If you are a judgment debtor who is faced with the prospect of an inheritance in the form of an outright bequest you may consider a “disclaimer” whereby you waive your right to the inheritance, and the inheritance automatically passes to you lineal decedents. In such case, a creditor could argue that the disclaimer was a form of fraudulent conveyance. A disclaimer would be easier to defend than a transfer of inherited money after the heir or beneficiary takes possession of an outright bequest. I am unaware of any court decisions reversing a disclaimer as a fraudulent conveyance.

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

Defendants Can Be Subject To Pre-Judgment Asset Freezes

I've written many time about clients who underestimate their creditors zeal and underestimate the ability of courts to freeze assets during litigation. Most people incorrectly believe that courts can do nothing more in civil cases than issue money judgements, and that creditors have the task of finding and seizing non-exempt assets. Most people also understand that courts can freeze assets though injunctions and temporary restraining orders to stop debtors from transferring their assets after money judgments are entered which give creditors an interest in debtors property.

Recently, I learned of a civil case in federal court where the federal judge took more drastic action to the dismay of the defendant. The court and plaintiff were frustrated by repeated delays on the part of the defendant and his litigation attorney to comply with plaintiff's discovery orders. The court sanctioned the defendant by dismissing his pleadings and entering a default for an amount to be determined later. Even though no amount of damages had been determined and no final judgment against defendant entered, the court ordered the defendant and his controlled business entities not to transfer any assets. This order is not directed to any specific property, but is a restraint on the persons from taking any action to transfer any asset.

This example shows that debtors can be subject to court orders freezing their assets before the final adjudication of a civil case. The court does not have to know about the debtors assets or where the assets are located. Any transfer of any asset wherever located would subject the defendant to finding of civil contempt. Asset protection planning that relies on placing assets in other states or countries beyond court jurisdiction will not work well against this type of asset freeze so long as the defendant has some control over the asset and the defendant is within the court's jurisdiction. Some lessons from this case are (1) that people must complete asset protection planning early and prior to litigation, (2) don't underestimate the power of creditors or the powers of judges determined to grant relief to creditors, and (3) all else being equal, asset protection plans are less effective to the extent the debtor has control over assets or their disposition.

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

Benefits of Nevada Corporations

From time to time, and most recently this week, a new asset protection client has previously established LLCs, corporations, or other entities in the State of Nevada. I asked the most recent person why he decided to pay significantly more money to set up an LLC in Nevada. corporation. He said that under Nevada law corporations may issue “bearer shares” whose ownership is established by physical possession. In theory, the client explained, just before a creditor asked under oath about his ownership of investment the stockholder can give the shares to someone else and truthfully testify that he owns no share of stock in any Nevada company because he has relinquished physical possession of the share certificates. This argument sounds better than it would work in the real world.

The problem is that the creditor protection of Nevada bearer shares works only if the creditor asks only if the debtor currently owns any corporate stock. In real life creditors can ask as many other questions as they want in an effort to locate assets subject to execution. For example, a creditor can ask if the debtor has owned any stock in the past years, and if so, what happened to the shares. A debtor must produce income tax returns. Tax returns include taxable income or losses from corporations and other investments. A creditor may ask about the current location and possession of any shares of stock which correspond to taxable income. A diligent creditor attorney will likely find out about any “bearer shares” a debtor owned previously and the current location of such shares. Giving possession of bearer shares to another person without fair consideration will likely be discovered and reversed as a fraudulent conveyance. I have never found any advantage for a Florida resident to establish corporations or LLCs in Nevada or any other state unless the Florida resident owns property or does business in the other state.

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

When Annuities Provide Better Asset Protection Than Homestead

The general rule is that when a debtor transfers or converts an exempt asset to another person, or to another form, there is no fraudulent transfer or conversion. If the transfer or conversion is reversed the property would revert to its initial exemption, and there is not harm to creditors from the transfer or conversion of an asset the creditors could not reach in the first place.

People need to be very careful, nevertheless, how they transfer an exempt asset if they foresee future legal problems. For example, Florida statutes protect the proceeds of an annuity. If a debtor sells an annuity and deposits the proceeds in a separate bank account the proceeds remain protected after the annuity sale. A transfer of the annuity proceeds from the bank account should not be a fraudulent transfer.

Proceeds from the sale or refinancing of homestead are treated differently. Pursuant to a Supreme Court decision proceeds from the sale of a homestead are protected only if they are intended to be reinvested in a new homestead within a reasonable time. Otherwise, once homestead equity is converted to cash the cash may be vulnerable to creditors even though the case represents homestead equity.

Consider for example a married couple whose homestead is owned in the name of the wife only where the wife takes out a home equity line of credit. If the wife draws a cash advance on the line of credit and deposits the proceeds in her bank account the proceeds become vulnerable to the wife’s creditors. If the wife transfers the line of credit proceeds to her husband the transfer could be attacked as a fraudulent conveyance. If the wife buys an asset with the homestead loan proceeds and titles the new asset in the husband’s name the transaction could be attacked as a fraudulent conveyance. On the other hand, the wife would defend a fraudulent conveyance action by arguing that the loan proceeds were put in her separate checking account only as a commercial necessity for the transfer of exempt homestead interest to her spouse. In this regard only, annuities are a better asset protection tool than homestead because of the express protection of annuity proceeds.

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

Asset Protection And Estate Planning Interplay

Effective asset protection sometimes contradicts proper estate planning. In Florida and some other states property owned by married couples as tenants by entireties is exempt from creditors with judgments against either spouse individually as long as they are married. An asset protection client could have easily and effectively protected property from future legal problems by transferring his property to joint ownership with his spouse. His problem was that his current spouse was his second marriage, and he had children by his first marriage. His estate plan was to ensure his children from a prior marriage ultimately received a substantial portion of his wealth. I pointed out that if he owned property tenants by entireties with his current wife, in the event he predeceased his wife all jointly owned property would be owned by his surviving spouse regardless of what he put in his will or living trust. At that point, his surviving spouse could leave the property to whomever she wished. She would not be bound by the testamentary intent of the deceased spouse. This person decided not to utilize tenants by entireties because he would lose control over the ultimate disposition of his property and could not protect the interests of his children. His asset protection plan became more complex and expensive as a result.

This was another example that asset protection is always part of overall estate planning. Just as an ill conceived asset protection plan, in this case tenancy by entireties, risks upsetting an important estate planning goal, the opposite is also possible. An estate plan which separates marital property to possible reduce estate tax exposure can take away otherwise desirable protections afforded joint ownership. An asset protection planner should know the client’s estate planning objectives.

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

Adding Protection to Single Member LLC

I have received many inquiries about asset protection of a single member LLC. Many attorneys and debtors are concerned about bankruptcy decisions in a few states which have allowed creditors to seize the membership interest of a single member LLC despite statutes in those states which, like Florida statutes, limit creditor remedies to a charging lien. I have previously commented in this Blog that this is an area for Florida debtors to watch, but that planning in Florida should not be dictated by isolated bankruptcy decisions in other states. I often use a medical analogy to explain my views to clients: in medicine, doctors do not immediately change established treatment protocols based on one or two contrary studies or adverse outcomes.

Nevertheless, those who wish to avoid the risk that a membership interest in a single member LLC may be attacked in some Florida court can employ a possible “fix” using a popular estate planning tool known as the intentionally defective grantor trust. A grantor trust is a trust which for income tax purposes is treated the same as its settlor. The fix involves setting up a two member LLC where one member is the business owner and the other member is the grantor trust established by the business owner. The grantor trust could have other family members as beneficiaries, and the trust would own a small interest in the LLC. Since the grantor trust is disregarded for income tax purposes, the IRS should treat this LLC as a single member LLC although for state law purposes it has two members. This arrangement would give the debtor a basis to distinguish the LLC from those single member LLCs which were subject to the adverse court rulings, but it would not change significantly the business structure and taxation.

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

Random Interesting Questions

Much of my typical day is spent answering interesting questions from clients and callers. Here are a few that were presented today:

Question: If a debtor owns a life insurance policy on his own life payable to his wife upon death, can a creditor of the debtor get the insurance proceeds upon his death. The answer is no. The life insurance death benefits become property of the non-debtor spouse upon the debtor’s death. If the debtor made his estate the beneficiary, or if he failed to designate any beneficiary, then his creditors could attach the death benefit when he died.

Question: if a federal bankruptcy court, or any other federal court, issues a judgment against a Florida debtor other than the debtor filing bankruptcy is the judgment debtor’s Florida homestead still protected? In other words, does Florida’s homestead protection afforded by state law protect against a judgment of a federal court as well as a state court? The answer is yes. Homestead protection does not distinguish the source of the judgment. Although some federal actions, such as IRS collections or criminal actions can impair homestead protection, civil money judgments from federal or state courts cannot be enforced against the debtor’s homestead.

Question: Inasmuch as a Florida homestead cannot be devised to anyone other than a surviving spouse or minor child, can a single spouse who owns the family homestead in his own name transfer or encumber the homestead during his lifetime. The answer is no, unless the spouse joins in the conveyance. The spouse has a legal interest in her homestead even if she is not on title. Minor children do not have to waive their potential homestead interest because, as minors, they are unable to waive their own rights and they are represented by their parent guardians.

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

Asset Protection Does Not Protect Against All Legal Risk

Asset protection planning is designed to protect debtors against civil money judgments. There are other types of legal liability for which asset protection is less effective including, for instance, court orders which demand that a defendant turn property over to the court or a plaintiff. These orders often come in the form of disgorgement orders or turnover orders. When a defendant is found to have obtained money wrongfully in violation of various federal laws such as regulatory statutes and regulations the court may order the defendant to disgorge the money to the court or the agency. Agencies such as the SEC or FTC frequently seek disgorgement remedies in federal court. Or, bankruptcy trustees frequently seek turnover orders requiring third parties to turn over to the trustee specific funds which the bankruptcy court believes is part of a debtor’s bankruptcy estate.

Failure to comply with these civil remedies is punishable by contempt and incarceration. Asset protection planning is less effective against this type of civil liability. The principal defense against civil contempt is impossibility of performance. Offshore trust planning is designed, in part, to afford the impossibility defense to defendants. Offshore trust documents on their face make it impossible for the beneficiary to demand return of funds, yet most offshore planning is not properly or effectively implemented. Other Florida exemptions such as homestead protection, annuities, and tenants by entireties do not provide reliable defenses against civil contempt although they are effective defenses against collection of state court money judgments.

Effective asset protection starts with identification of the nature of legal risk. Many people who begin asset protection planning after they encounter legal problems do not understand the nature of civil remedy they face. A legal problem which at worst will result in a money judgment indicates one set of asset protection tools. A more serious legal problem which could result in court orders enforceable by contempt proceeds indicates more extreme asset protection planning with a lesser chance of success. Before you seeks asset protection advice you should understand your legal risks.

Asset Protecting Causes of Action

Asset protection planning often overlooks the value of claims or lawsuits the debtor has against creditors or other third parties. For example, I consulted with a client who owed another state a substantial income tax debt because a large tax shelter was disallowed by the IRS and subsequently the state revenue department. The client had liquidated most of his assets to pay the IRS, but he wanted to protect what he had left from the state. The client had several lawsuits pending against accounting firms, lawyers, and financial firms which issued opinion letters to the effect that the tax shelter was legally valid— which it was not. The state department, or any other civil creditor, could easily levy upon the client’s claims and lawsuits against the third parties who caused his tax liability. Most of any settlement would go to pay taxes. It is very difficult to protect causes of action, in part, because they are matters of public record once filed in a lawsuit. There is little market to sell or encumber a lawsuit whose outcome is uncertain. Any attempted assignment would not survive fraudulent conveyance allegations. Asset protection planning of potential causes of action is best done before litigation is begun.

Finding Relief From A Receiver

Previous post have discussed an aggressive creditor collection tactic to collect judgments against Florida residents from courts outside of Florida. Briefly, the creditors had the foreign court appoint a receiver over the person of the debtor and all his non-exempt personal property. The receiver obtained an order from the foreign court ordering the Florida debtor to appear with his non-exempt personal property in the foreign court house and hand over the property to the debtor. The creditor asked for specific personal property owned by the debtor. When the debtor does appear at the first scheduled hearing with his property, the creditor seeks an order holding the Florida debtor in contempt and ordering his arrest. Two of my clients are currently under this type of receivership attack

The first client appears to have mounted a successful counterattack. I referred the client an Orlando litigation attorney who, working with me, sued the foreign receiver in a Florida court. Our complaint asked the Florida court to declare the debtor’s specific personal property to be exempt from process under Florida law and therefore not subject to collection by any foreign receiver. The Florida court gave us what we asked for. The Florida court issued an order finding, item by item, that the client’s personal property is exempt from levy, that he has no non-exempt property, and ordering the receiver to stop further levy upon this exempt property. We sent the order to the debtor foreign counsel to quash the receiver’s continued attempt to seize the property in Florida. When faced with a foreign receivership over a debtor and his personal property, it seems that the best defense is to open a proceeding in Florida, name the receiver as defendant, and ask to Florida court to decide whether specific property of the debtor is exempt under Florida law.

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

Landlord Not Covered By Insurance Policy

I spoke with a prospective client who owned rental apartments and who was threatened by one of his tenants with a lawsuit. The tenant alleged he suffered damages because the landlord failed to make repairs to the rental unit which caused the unit to be inhabitable. The tenant said he was suing for emotional distress suffered by his family and would seek punitive damages to teach the landlord a lesson. The client had liability insurance of $3 million. I asked why he needed asset protection if he was insured. The client said his insurance policy did not cover damage from emotional distress or punitive damage awards. The incident illustrates the limits of many insurance policies. Most liability insurance covers damages from negligence, but it may not cover extraordinary damages on theories such emotional distress or punitive damages for intentional wrongs. Your adversaries have no obligation to limit their lawsuits to legal theories covered by your insurance policies, and your insurance company will do whatever it can to exclude your lawsuit from coverage.

How Not To Move To Florida

A Colorado client/defendant had his move to Florida stymied by his creditors. The story is an example of how not to move to Florida. The defendant owned a house and financial accounts in Colorado where a lawsuit against him is pending. No judgment has been entered. The defendant purchased a house in Florida and moved into the Florida house. The Colorado house was put on the market. The creditor found out the client had moved into his Florida homestead.

Even though there was no money judgment against the defendant, the creditor filed a petition with the Colorado court to freeze the defendant's Colorado assets. The court issued an order freezing his financial accounts in Colorado and his Colorado house. The creditor also asked the court to appoint a receiver over the defendant, personally, and all his property whether located in Colorado or Florida. This is the second time this year I have seen a creditor in another state create a receivership over a Florida resident. I have talked to several Florida attorneys about this issue, none of whom believe a Florida court will enforce a foreign receivership. Yet, the client still faces possible contempt of court if he does not appear in Colorado in his receivership case, and enforcement in Florida is undecided.

This example shows that moving to Florida has pitfalls if not done properly. Residents of other states should first liquidate or encumber real property in their home state before buying a Florida homestead. Financial accounts should be liquidated and moved to Florida before announcing change in residency. Creditors know it is difficult to collect unsecured judgments in Florida, and they will take aggressive measures to stop a debtor from leaving the state where litigation is pending.

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

Making Financial Statements Work For You

I received my bank's annual request asking that I redo personal financial statement in order to extend my firm’s line of credit. My first reaction was to treat the request an a bureaucratic annoyance; I already supplied copies of my tax returns and the bank knows that my outstanding loan balance is minimal compared to income and assets. Upon further consideration I realized that this annual personal financial statement can play a very positive role in maintenance and substantiation of an asset protection plan, and I appreciated the opportunity to describe my asset ownership to a friendly creditor.

After obtaining a judgment award, one of the first set of documents a creditor seeks from the debtor are all financial statements submitted by the debtor to any lender in recent years. The creditor uses the debtor’s own financial statements to discover assets and to show how the debtor previously described the value and ownership of his assets. Most people inflate asset values when submitting financial statements to banks, and more important, most people are not careful to accurately describe the nature of their ownership interest. Creditors demand that debtors explain any discrepancies between assets owned and valued on prior financial statement and the assets otherwise disclosed in depositions in aid of judgment execution. Financial statements to lenders that inflate net worth can themselves undermine otherwise carefully planned asset protection.

Financial statements should be used as a tool in your your asset protection planning. Clients should complete financial statements assuming they will someday be shown to a judgment creditor. Use the financial statement as an opportunity to bolster your asset protection plan. Rather than bragging to banks about your wealth on a financial statement, value your assets conservatively so that asset values are no higher than what reasonably is required to substantiate a loan request. If you own assets in a limited liability company or partnership make sure your financial statement shows that you own interests in the entities and does not state, incorrectly, that you own the underlying asset itself. Be careful to list only your 50% interest in those accounts owned jointly with your spouse resisting the temptation to claim the entire account as your own asset. All legal entities, ownership structures, and encumbrances which are part of your asset protection plan should be clearly stated on each and every financial statement you ever complete. Be very conservative and be very precise in completing these forms.

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

Tenants by Entireties Can Be Effective Estate Planning

Tenants by entireties may be used for asset protection without diminishing other estate planning goals according to a Private Letter Ruling issued by the IRS late in 2004. Estate planning attorneys typically recommend that spouses divide ownership of property to the extent necessary for each spouse to take advantage of their individual estate tax credit ($1.5 million today). Because tenants by entireties property has the legal property of survivorship all marital assets owned tenants by entireties automatically pass to the surviving spouse. Consequently, the deceased spouse is unable to apply his estate tax credit to property owned during his lifetime with his spouse as T by E. All tenants by entireties is subject to taxation at the death of the second spouse who has available only one estate tax credit to cover all the property. Tenants by entireties is thought to provide good asset protection but poor estate planning. Up until now people with taxable estates had to choose between the asset protection benefits of entireties ownership and the estate tax benefits of separately owned property.

According to Private Letter Ruling 200503024 the surviving spouse may disclaim their survivorship interest in property owned jointly with the deceased spouse with rights of survivorship. Each spouse can execute a pour-over will which provides that all property passes on their death to a living trust which contains a credit shelter trust to utilize their estate tax exemption. The surviving spouse can disclaim enough tenants by entireties property upon the first death to fully fund the decedent’s credit shelter trust. This way the spouses have tenants by entireties from creditors during their lifetime and fully utilized estate tax credits upon their deaths. Alan Gassman presented this planning tip during his presentation at the Florida Bar’s Wealth Protection Conference in Miami on May 13, 2005.

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

Don't Believe Your Own Baloney

My website includes a list of common asset protection mistakes- no mistake is bigger than underestimating creditors and their attorneys. Clients and many professionals are too quic