James Karl Associates Law Office - Marco Island Florida Attorney

Protecting Your Assets

Tips on Protecting Your Assets

One of the best ways to protect your assets is to be or become a Florida resident and buy or own the home you live in. This will give you all the benefits of Florida homestead.

Homestead is given meaning in three different contexts under Florida law: 1. exemption from forced sale before and at death per Art. X, Section 4(a)-(b) of the Florida Constitution[1], 2. restrictions on devise and alienation, Art. X, Section 4(c) of the Florida Constitution and 3. exemption from taxation per Art. VII, Section 6 of the Florida Constitution. Florida's homestead exemption providing an exemption from forced sale before and at death are among the most protective in the United States as it provides "no limit" to the value of certain real property that can be protected from creditors. The property tax exemption clause of Article VI renders property tax-free to the extent of certain dollar amounts in the value of the homestead.

It should be noted that the definition of a homestead is not necessarily co-extensive for Article X, Section 4 (a)-(c)exemption purposes (exemption from creditors and restrictions on descent and distribution) and Article VI purposes (exemption from taxation). Both provisions apply automatically upon the establishment of a primary residence in Florida, but to reap the tax assessment benefits, the homestead exemption must be claimed by a filing with the state. Homestead can be lost if the homeowner abandons use of the real property as a homestead.

Scope of the Creditor Protection

Florida's creditor protection homestead provision is one of the broadest in the United States. The value of the property that can be protected is unlimited, so long as the property occupies no more than ½ acre (2,000 m²) within a municipality, or 160 acres (650,000 m²) outside of a municipality. The provision is written into the Florida Constitution, Article X, section 4, so it can not be removed without a constitutional amendment.

Because of the scope of the protection afforded, persons from other states with heavy debts or large court judgments against them have been known to purchase expensive estates in Florida, a famous example being O.J. Simpson. This strategy has been somewhat impaired by the 2005 Bankruptcy Code amendments.

One event that can drastically affect the value of a homestead is municipal incorporation. If a 160 acre (650,000 m²) non-municipal homestead is on land that is later incorporated into a municipality, the homestead will be grandfathered in and remain protected for the owner and his heirs. However, for any future purchasers of all or part of the property, the protected land will drop to the ½ acre (2,000 m²) allowed within a municipality.

Protection from Creditors

The homestead exemption offers virtually absolute protection from forced sale to meet the demands of creditors, except under three special circumstances listed below.

One unique feature of Florida's homestead exemption is that it attaches to proceeds from the sale of a home, if the homeowner intends to use those proceeds to establish a new Florida homestead within a reasonable time. Therefore, if the owner of a $1,000,000 home sells that home and puts the money in a bank account, that money is still protected by the homestead exemption, so long as the homeowner has a bona fide intent to use it to purchase another home in Florida entitled to the exemption within a reasonable period of time. This protection is lost if the funds are commingled with other funds not designated for such a purchase. Also, the protection only extends to the amount the owner intends to invest in a new homestead - if the owner of a $1,000,000 home sells that home, and makes clear his intent to purchase a $750,000 home, the remaining $250,000 will lose its protection.

Exceptions for Certain Creditors

Three types of creditors can still force the sale of a homestead to collect debts owed to them. These are:

1. The State of Florida and its counties or municipalities, to collect past due property taxes;
2. Parties to whom the property was specifically pledged as credit for a mortgage;
3. Mechanics who are owed money for work performed in repairing or improving the property.

Because the homestead exemption is state law, it can also be overridden by the federal law due to the Supremacy Clause of the United States Constitution. Federal income tax liens are superior to the homestead protection provided by the Florida Constitution. The Internal Revenue Service's policy is reluctant to foreclose on taxpayer's homes to enforce these liens, often only getting satisfied if the real property is sold or mortgaged before the tax lien expires.

Protection to surviving spouse or minor child

The provision also protects a spouse in several ways. First, it restrains the homeowner from conveying the property without the approval of their spouse, even if the property is entirely in the name of one spouse, or was purchased entirely from funds of one spouse. The provision also prohibits a spouse from devising the property by will, if the homeowner is survived by a spouse or a minor child. A spouse may waive these rights in writing with respect to the will, but a minor child is not competent to do so. Finally, the homestead exemption for property taxes automatically attaches to the surviving spouse, so the property will never be exposed to the creditors of either spouse because of the death of the other.

In Florida, our home is truly our castle, a castle that is impenetrable by creditors. The Florida Constitution exempts homestead property from levy and execution by judgment creditors. Florida courts have liberally expanded definitions of homestead property which includes more than just a single family house. Condominiums, manufactured homes, and mobile homes are also afforded homestead protection. The Constitution defines homestead as one's principal place of residence up to one-half acre within a municipality and up to 160 contiguous acres in any county in Florida.

To qualify for homestead protection, a debtor must be a permanent Florida resident and the homestead property must be his primary place of residence. Property purchased as a future residence is unprotected until the property is occupied as a principal residence. A second home or investment property cannot be considered a Florida homestead. Only "natural persons" quailfy for homestead protection so properties titled in the name of irrevocable trusts, corporations, limited liability companies, or partnerships will not qualify. Property owned by a living trust can be homestead property. A newly-enacted Florida Statute provides that property owned by a land trust may be homestead property.

What makes Florida's homestead protection such a powerful asset protection tool is its unlimited monetary protection. A Florida resident can invest millions of dollars in large estate homes and farms and protect the full value of these luxury residences under Florida's homestead law. Under a Florida Supreme Court ruling, a person can transfer unprotected, non-exempt assets to his homestead at any time by either buying a new home or reducing the principal balance of an existing mortgage and protect this money under the homestead umbrella, even if the asset transfer was clearly designed to hide money from creditor claims. There are limited exceptions to this general rule pertaining to money obtained by deceit, fraud, or other egregious means. The Florida Constitution does not protect homestead property against tax liens, mortgages, homeowner association assessments, or from mechanics liens associated with labor or materials to repair or improve the homestead property. Also, the asset protection benefits of homestead should not be confused with the homestated tax exemption; the tax exemption and creditor exemption are similar but different rules can apply to each.

Homestead protection may not apply if the debtor files bankruptcy. Under the new bankruptcy law, homestead protection is available in bankruptcy up to $137,000 unless the debtor occupied his current Florida homestead property and previous Florida homestead properties for a continuous 40-month period. Joint bankruptcy debtors can protect $274,000 of jointly owned homestead. Also, transfers of cash into homestead within 10 years intended to defraud creditors may be challenged by the bankruptcy trustee. The new bankruptcy law has no effect on Florida's unlimited homestead protection outside of bankruptcy.

Domestic Asset Protection Trust

A so-called "self-settled" trust is a trust where the person who creates the trust and transfers the assets to the trust is also a turst beneficiary. A living trust is a common example of a self-settled trust used for estate planning. Under Florida law established by a long and consistent line of court decisions, a self-settled trust does not protect the trustmaker's beneficial interest in the income or principal of the trust from the trustmaker's creditors.

Offshore trusts provide asset protection benefits mainly because statutes in select foreign countries state that a trustmaker's beneficial interest in a self-settled trust formed in their country is protected from the trustmaker's own creditors. These offshore trust statutes include other debtor-friendly provisions to encourage new trust business. Some states in the United States have recently enacted statutes which expressly grant these same type of asset protection benefits to self-settled trusts at one time found only offshore. Trusts created under these state statutes are referred to as domestic asset protection trusts ("DAPT"). These DAPTs were encouraged by state legislatures in an attempt to provide investors and business owners the protection of offshore trust planning within the United States in large part to attract businesses and assets to their states.

Most state DAPT statutes have several common features. The statutes provide that the DAPT is irrevocable so that assets transferred to the trust may not be withdrawn by the trustmaker. The statutes also require at least one trustee to be either a state resident or a corporation doing business in the state. Some trust assets must be located or deposited in the state. The DAPT statutes, like their foreign counterparts, typically provide for a position of "trust protector" who is a person with power to veto the trustee's decisions to make distributions if such distributions may be vulnerable to the trustmaker's creditors.

Alaska, Delaware, and Nevada are states with favorable domestic asset protection trust laws. Of these three states, many attorneys consider Nevada to be the best DAPT jurisdiction. For example, Nevada law provides creditors the ability to challenge asset transfers to a trust as a fraudulent conveyance two years after the transfer is made or six months after the transfer is discovered. In Alaska and Delaware, by contrast, a creditor has four years to challenge a fraudulent conveyance to their states' DAPTs. Nevada law also has relatively flexible trustee provisions under which a settlor can appoint himself as trustee over trust investments as long as an independent trustee has discretion to make trust distributions.

A DAPT works well in theory. Many qualified commentators have published persuasive legal arguments supporting the DAPT's asset protection. However, to date, no DAPT has been tested in a Florida court. While there may be a good legal theory why a Florida court should uphold the asset protection features of any trust created under the laws of another state, doing so would contradict a well-established public policy in Florida denying asset protection to any self-settled trust.

Florida's New Trust Law

The Florida legislature enacted an important new trust statute during the 2006 legislative section. The new Florida Trust Code, found primarily in Chapter 737, Florida Statutes, will become effective on July 1, 2007. Except as specifically provided, the new trust law applies retroactively to all Florida trusts previously created. The trust law has its greatest impact on estate planning and trust administration. Several provisions in the new law are important for using trusts in Florida asset protection planning.

To begin with, Florida courts have consistently held that a beneficiary's interest in a trust established for his benefit by another person is protected from the beneficiary's creditors so long as the trust agreement includes a "spendthrift provision." A spendthrift clause typically states that a beneficiary may not assign or convey his beneficial interest. This type of trust language is called "spendthrift" because it is supposed to prevent an otherwise improvident beneficiary from squandering his inheritance. Florida courts have held that if the trustmaker prohibits the beneficiary from assigning his beneficial interest then the beneficiary's creditors cannot force the assignment to pay the beneficiary's debts.

Florida's new trust law gives statutory recognition to spendthrift provisions. To be effective under the new statute a spendthrift provision must expressly restrain both voluntary and involuntary transfers of a beneficiary's trust interest. Unless both types of transfers are prohibited in the trust agreement the spendthrift provision will not meet the statutory requirements. After a trustee makes a distribution from a spendthrift trust to a beneficiary the money once in the beneficiary's hands is no longer protected from the beneficiary's creditors.

Florida's new trust code includes two exceptions to spendthrift protection. First, the statute prohibits a trustee from withholding a distribution otherwise due to be paid to a beneficiary solely to protect the distribution from the beneficiary's creditors. Overdue mandatory distributions can be garnished from a spendthrift trust. The second exception from spendthrift trust protection includes so-called "exception creditors" or "creditors of last resort." These special creditors include claims by a beneficiary's child, claims of former spouse for support and maintenance, and claims by creditors (such as an attorney) who have provided services for the protection of a beneficiary's interest.

Another exception is made for claims by a state of the U.S. to the extent provided in a separate law.

The next part of the new Florida trust law with asset protection implications is new Section 736.0504(1) which protects beneficiaries of discretionary trusts. The new law states that a beneficiary's creditor cannot compel a trustee to make a discretionary distribution of income or principal to a trust beneficiary when the distribution would become vulnerable to the beneficiary's creditor claims. This protection against forced distributions applies whether or not the trust has a spendthrift provision, whether or not the trustee's discretion is subject to a standard, and whether or not the trustee may have abused his discretion. The same protection of the trustee's discretionary distributions applies to trusts where the beneficiary is also the trustee, provided in that case that the trustee's discretion to distribute property for his own benefit is limited by an ascertainable standard of discretion. A typical ascertainable standard is the health, support and maintenance of the beneficiary. As long as the trust agreement's provisions for discretionary distributions includes an appropriate standard a debtor who is both a trust beneficiary and the appointed trustee over his own trust share can exercise his discretion to withhold distributions in order to protect the trust property from his own creditors.

The asset protection provisions of the new Florida trust law apply only to trusts set up by a trustmaker other than the beneficiary. A trust established for one's own benefit, a so-called self-settled trust, provides no asset protection benefits under the new trust statute. The new trust code states that whether or not a self-settled revocable trust agreement includes a spendthrift provision the trust property is subject to the claims of the settlor's creditors. This exception is consistent with several Florida court decisions refusing creditor protection from self-settled trusts for reasons of public policy. A common self-settled trust is a revocable living trust used for estate planning. A living trust provides the settlor/trustmaker no asset protection. Even in the case of an irrevocable self-settled trust, a creditor may attack the maximum amount that the trustee may distribute back to the settlor.

An excellent summary of the new trust law is an article written by David Power in the August, 2006 issue of the Florida Bar Journal (available online at http://www.floridabar.org).

Mortgage Foreclosure Deficiency

Many Florida real estate investors are concerned about personal liability from mortgage foreclosure deficiency judgments. Although they accept loss of equity, if any, in property which is foreclosed by their mortgage lender, people are afraid of a deficiency judgment. A deficiency judgment refers to a mortgage lender's judgment against the borrower for the difference between the outstanding balance of the mortgage note, plus costs and attorneys fees, and the value of the property foreclosed. The property value is determined on the date of the foreclosure sale.

In Florida, a mortgage foreclosure does not automatically result in a deficiency judgment. Just because you lose a property at foreclosure does not mean you will remain personally liable for money owed to the lender . To obtain a deficiency judgment against the borrower the foreclosure sale the mortgage lender has to file a motion for a deficiency after the foreclosure sale, and the court must hold a separate evidentiary hearing on the lender's request for deficiency liability. At the evidentiary hearing the mortgage lender has to show the court evidence that the property's value on the sale date was less than the note balance. The borrower can get his own appraisal or can use the government's tax assessed value as evidence of value. If the property was worth more than note balance on sale date the court will not give the mortgage lender a deficiency judgment against the borrower. The borrower may present evidence of value in the form of a formal appraisal or other less formal opinions of value such as the local government's tax assessed value.

During the recent real estate boom deficiency judgments were uncommon because increasing real estate values brought home values above note balances of defaulting mortgages. Additionally, lenders could take back "upside down" properties and hold them until the rising market made them whole. Up to this point in the real estate crash few mortgage service companies with conventional mortgages have been pursuing deficienty judgments, especially mortgages on owner occupied homes. Second mortgage lenders and private lenders are more likely than first mortgage holders to go after deficiency judgments. Banks that made commercial loans to developers or builders almost always file a lawsuit against the individual borrower to enforce the promissory note. As the real estate recession worsens more conventional mortgage lenders may pursue deficiency judgments. If a mortgage lender pursues a deficiency judgment you should hire an attorney to defend the deficiency. In many cases, an attorney can use procedural defenses and substantive lending law to defeat a deficiency claim, and the attorney can negotiate an acceptable settlement for much less than the total deficiency liability in most cases.

Another problem with mortgage foreclosure is possible income tax consequences. The general rule is that when a lender forgives or cancels a debt the borrower can incur income tax on the amount of debt forgiveness. When you arrange a discount in your mortgage in order to sell house (a so-called "short sale") the mortgage lender will cancel part of your mortgage debt and you will receive a tax form 1099 telling the IRS that you have imputed income for the amount of debt reduction. You will also incur income tax liability for a deed in lieu of foreclosure. The taxable income will be the difference between the property value and the balance of the mortgage loan on the date you surrender the property to the bank.

A foreclosure may result in cancellation of debt income depending on whether the bank pursues a deficiency judgment. If the mortgage lender gets a deficiency judgment for the difference between the property value on foreclosure sale date and the mortgage balance the lender is not forgiving any part of the loan. If the bank chooses not to pursue a deficiency judgment, or pursues the judgment unsuccessfully, the borrower may incur income tax liability for debt foregiveness.

In December, 2007, Congress acted to protect many debtors from income tax liability associated with foreclosure avoidance. The Mortgage Forgiveness Debt Relief Act of 2007 states that homeowners will not be subject to income tax from release from mortgage liability if and to the extent the mortgage proceeds were used to buy or improve their primary residence. There is no income tax shelter from foregiveness of mortgage debts for investment property, vacation homes, or mortgages used for businesses or to pay off credit card balances. The protection expires in December, 2009. You should speak with an attorney or CPA familiier with the new law to see if you qualify for income tax protection.

For those borrowers who do not qualify for protection of the new Act there is an insolvency exception to imputed income from the cancellation of mortgage debt. If a borrower is financially insolvent when he surrenders the mortgaged property to the lender voluntarily or through foreclosure there will be no imputed income. A borrower who files bankruptcy is presumed to be insolvent, so that a bankruptcy debtor cannot suffer imputed income tax liability because the bankruptcy discharges personal liability under a mortgage note. More information is available from IRS Publication 908 and IRS tax form 982. Both forms can be found at irs.gov. The tax law permits many real estate investors to offset imputed debt foregiveness income with corresponding tax losses. For example, if a lender forecloses on a prcel of income producing rental property you may be able to report a capital loss to offset all of your imputed income from debt foregiveness in the same year you receive a 1099 from the mortgage lender. When your foreclosed property was not income producing but was held solely for future appreciation, your capital losses may be limited to $3,000 per year so that the total loss will have to be amortized over many future tax years. You should consult your CPA to determine the tax impact of a mortgage foreclosure on your tax situation. The tax impact of foreclosure is not a legal issue.

Fraudulent Conveyances

What are fraudulent transfers and conversions?

The most important issue in any asset protection plan is whether or not previous planning transactions constitute fraudulent transfers or fraudulent conversions (collectively, "fraudulent conveyance") as defined by Florida Statutes. A fraudulent transfer is a debtor's transfer of legal title to his real or personal property to a third party with the intent to hinder, delay or defraud a present or future creditor. A fraudulent conversion is a debtor's conversion of non-exempt real or personal property subject to creditor attack to a different type of property, still owned by the debtor, which new property is exempt or immune from creditor attack. Florida Statues provide that a creditor can sue to overturn a transfer or conversion up to fours years after a conveyance was made or obligation incurred. Asset protection planning and transfers become immune from fraudulent conveyance suspicion four years after the planning takes place.

What is the consequence of making a fraudulent transfer or conversion?

Florida Statutes provide courts equitable remedies to undo fraudulent asset protection planning. Fraudulent transfers or conversions may be undone and reversed by a court's putting the property back in the debtor's hands where the property becomes subject to the creditor collection process. The Statutes provide several equitable remedies to assist the creditor's collection of these converted assets including injunctions against further transfers, imposing a receivership on the assets, or imposition of a constructive trust. A creditor alleging fraudulent conveyance may sue not only the debtor transferor but also the transferee who received the property in order to undo the transfer. Consequently, a fraudulent transfer to a friend or family member is likely to make that friend or family member a defendant in a creditor's fraudulent transfer lawsuit. Fraudulent conveyances are not prohibited and are not illegal. The subject statutes do not provide for awards of additional damages against the debtor, and the statutes certainly do not impose criminal fines or penalties. Florida courts interpreting these statutes have pointed out that a debtor's monetary liability cannot be increased because the debtor made a transfer or conversion later determined to be a fraud against present or future creditors. What makes a transfer or conversion a fraud against creditors?

Not all transfers or conversions which move assets beyond a creditor's reach are fraudulent and subject to reversal. Whether or not a transfer or conversion is intended to hinder, delay, or defraud creditors depends on the debtor's purpose and his intent behind the transfer or conversion. To ascertain the debtor's purpose and intent of a property transfer courts look to factors which are often indicative of intent to avoid creditor claims. For example, a court will examine whether any particular transfer was made to a debtor's family member; whether a transfer was concealed; whether the debtor retained effective use or control over the property transferred; and, whether the transfer rendered the debtor insolvent. All of these above factors suggest that a transfer was a fraudulent conveyance which the courts should reverse.

Defense against fraudulent conveyance allegations.

When a creditor is trying to collect money from a debtor who has previously engaged in asset protection planning and has little or no assets easily subject to creditor collections a creditor will almost always institute an action attacking one or more of the debtor's prior transfers as fraudulent transfers or conversions. Just because a creditor believes a conveyance was intended to defraud creditors does not mean a court will set aside the conveyance. A debtor can show many legitimate reasons to convey assets other than avoiding creditors.

How the fraudulent conveyance issue impacts asset protection planning?

Just the possibility of a creditor's allegations of fraudulent conveyance should not deter aggressive asset protection planning prior to time a judgment is entered by a court. People have a constitutional right to control or transfer their property until such time as a judgment creditor obtains a legal interest in the property. This is why the applicable statutes do not prohibit or make illegal fraudulent conveyances. Because a court cannot increase the amount of the judgment damages already awarded against a debtor because of a debtor's fraudulent conveyance, there is little or nothing to lose by planning to protect your property even if some planning might be subsequently challenged or even reversed.

Biggest Mistakes in Asset Protection Planning

1. Not Understanding the Purpose of Asset Protection: Asset protection will not make you "judgment proof."

2. Waiting Too Long To Begin Planning: Preventive planning is both most effective and least expensive before you have legal problems.

3. Believing That It Is Too Late To Protect Assets: Its never too late to improve protection. Anything is better than doing nothing.

4. Thinking Creditors are Stupid or Lazy: Don't underestimate the skill and intelligence of your adversaries. Creditors and their attorneys are not stupid.

5. Hiding Assets : There are no longer any secrets in this world. You cannot hide assets, offshore or anywhere else, to protect the assets from creditors, the IRS, or former spouses.

6. Fraudulent Transfers and Conveyances: You cannot protect assets by giving them to family members.

7. Misunderstanding Salary Exemption: Traps for single business owners.

8. Confusing Estate Planning With Asset Protection: Asset protection is part of estate planning, but a living trust or self-settled irrevocable trust does nothing to protect your assets from creditors.

9. Confusing Bankruptcy Law and Asset Protection Law: The new bankruptcy law does not affect Florida's unlimited homestead exemption and other exemptions outside bankrutpcy court.

Giving Up Control Over Your Assets: The easiest asset protection plan is to give someone else control over your wealth. This is not a good solution.

Debtor Liability - Can Asset Protection Get You In Trouble

Any creditor can attack the implementation of an asset protection plan by alleging that certain transfers of your assets to other people or entities or the investment of money in exempt assets (such as annuities) constitutes a fraudulent transfer or fraudulent conversion because these conveyances were done with the intent, or effect, to hinder, avoid, or delay creditor collection. Any asset protection conveyance can be challenged as "fraudulent" for up to four years even if you had no obligation or duty to the challenging creditor when your asset protection planning was implemented.

The terms "fraudulent transfer" and "fraudulent conveyance" have a bad connotation, and many people incorrectly confuse these technical legal terms in asset protection law with the tort of common law fraud or even with criminal fraud. As a result, some people are fearful that asset protection planning could result in their being held liable for damages in tortious fraud or even charged with criminal fraud. Just the opposite, several Florida court decisions, as well as some federal courts in other states, have held that a fraudulent conveyance to avoid creditors claims is not tortious fraud and is not criminal fraud. As a result, a creditor who claims that part of your asset protection planning involved a fraudulent conveyance cannot also charge you with the crime of fraud and cannot seek additional civil damages based on common law theories of fraud, deceit, or misrepresentation.

The Florida law of fraudulent conveyances are based on specific Florida statutes, particularly Florida Statutes 222.30 and 726.101. These Statutes provide that a creditor may seek from a court equitable remedies to undo a fraudulent conveyances made to implement an asset protection plan. These equitable remedies are designed to put property back into the debtor's hands so that the same property is available to satisfy a creditor's judgment. Additionally, if you had transferred property to a third party, such as a friend or family member, and the transferee (recipient) is unable or unwilling to return the property, the court may impose a money judgment against your transferee for the value of the property conveyed. Even then, you are not liable for any additional damages based on the value of property fraudulently conveyed.

Therefore, asset protection planning is very unlikely to increase your liability and unlikely to get you in trouble. In almost all cases, even if part of your asset protection planning is successfully challenged as a fraudulent conveyance, a court will only put you back in essentially the same legal situation you were before your asset protection plan was implemented.

Joint Ownership

Most married persons own property as joint tenants with rights of survivorship. Upon the death of one spouse, ownership is vested by operation of law in the surviving spouse. Many married people incorrectly believe that their jointly owned property is protected from their creditors. This belief is incorrect. Joint ownership with rights of survivorship offers no asset protection. A creditor of either spouse may seize the interest the debtor spouse holds in joint tenant property.

Unlike joint ownership with rights of survivorship, "tenants by entireties" ownership affords excellent asset protection benefits. Tenants by entirety is a special form of joint tenancy ownership which is available only to married persons. Some states have statutes that define and protect tenants by entireties property. In Florida, tenants by entireties protection has been established by judicial decisions interpreting the common law. Under Florida judicial law, in order to qualify as tenants by entireties property, the property in question must have certain characteristics:

joint ownership and control,
identical interest in the property,
the interest must have originated in the same instrument,
the interest must have commenced simultaneously,
the parties must have been married at the time they acquired the property, and
the surviivng spouse will own the property after either spouse dies.

In the case where both spouses are jointly indebted to a particular creditor, that creditor can involuntarily seize tenants by entireties property. Tenants by entireties protection exists only if a creditor has a claim against only one of the spousal owners. Most states with entireties protection afford the protection only to real property. In Florida, unlike most other states, all types of property, including all real property, tangible personal property, and intangible personal property, may be owned by a married couple as tenants by entireties. Whether a married couple owns property as unprotected joint tenants with survivorship or as protected tenants by entireties depends on the intent of the spouses. The Florida Supreme Court has said that any real or personal property owned jointly by a hustand and wife is presumed to be owned as tenants by entireties. A creditor could rebut this presumption by showing that the property ownership does not possess all six entireties characteristics or that the husband or wife indicated an intent to own the property in some other manner.

In Florida, tenants by entireties is the quickest and simplest asset protection for married persons. This form of ownership, however, may not provide secure asset protection over the long term. First, a divorce between the spouses immediately converts the tenants by entireties into a joint tenancy between the former spouses. In that case, the assets of the debtor spouse would immediately be exposed his or her creditors. Likewise, a death of one spouse terminates the tenants by entireties and vests the property solely in the surviving spouse. If the surviving spouse has creditors, the asset protection afforded by the tenants by entireties ownership is lost. Secondly, tenants by entireties ownership creates problems for estate planning and interferes with estate tax avoidance.

Attorney Liability

Many attorneys are reticent about asset protection work because they fear exposing themselves to personal liability for assisting their clients' transfer of assets to avoid exposure creditor claims. Florida's fraudulent conveyance statutes do not specifically address liability of third parties, including a debtor's attorney, who advise and assist the debtor with a transfer or conversion which is subsequently deemed a fraudulent transfer or conversion. Until recently, no Florida appellate court has addressed the issue whether a cause of action exists against an attorney, as well as other third parties for assisting a fraudulent asset transfer or fraudulent conversion pursuant to §222.30 or §726.101 of the Florida Statutes.

Three Florida cases decided in 2003 in different appellate districts have addressed this issue. The first decided case, BankFirst v. Paine Webber, et al., 842 So 2d. 155 (Fla. 5th DCA, 2003) involved a debtor who had personally guaranteed a corporate debt of an insolvent corporation. After the corporation became insolvent, the debtor with the help of his UBS Paine Webber financial advisor and his attorney adopted an asset protection plan in which debtor transferred non-exempt assets to a domestic limited liability company whose shares were owned by an offshore trust sited in the Bahamas.

The Fifth Circuit's holding is short, yet clear and powerful, consisting of only one sentence:

"The order dismissing BankFirst's claim against USB Paine Webber, et al. is affirmed based on our conclusion that neither §222.30 nor Chapter 726, Florida Statutes, creates a cause of action against a party who allegedly assisted a debtor in a fraudulent conveyance or transfer of property, where the person does not come into possession of the property."

The Fifth DCA's holding protects debtors' attorneys, financial advisors, accountants, and any other party whether or not an agent of the debtor, for any involvement in aid of the fraudulent conveyance short of actually possessing the transferred property.

A second case, Danzas Taiwan, Ltd. v. Freeman, (fn- 2003 WL 2107584, May 14, 2003), involved an allegation that a Taiwanese freight forwarder engaged in a conspiracy to commit fraudulent transfers. The creditor advanced the theory that there was personal jurisdiction over Danzas Taiwan because the company had committed a tortuous act in Florida, specifically its facilitation of a fraudulent conveyance. The Third DCA cited the Fifth DCA's BankFirst ruling and agreed that there is not cause of action against one who assist a debtor in a fraudulent conveyance. It concluded that because there was no cause of action possible against Danzas Taiwan for conspiracy, there was not possible allegation that the company committed a tortuous act that would subject it to the Court's jurisdiction.

The Third DCA also cited its own previous ruling issued in March, 2003 in Beta Real Corporation v. Graham.( 839 So. 2d 890 Fla Dist.3 2003). The defendant debtor allegedly conveyed $1.4 million of cash into the Florida bank account of Beta Real Corporation, a British Virgin Islands company. The Third DCA decided that receiving property fraudulently transferred by a debtor is not a tortuous act citing many decisions of both state and federal courts which have held that a fraudulent conveyance is not an intentional tort.

In May 2003, the Eleventh Circuit Court of Appeals certified to the Florida Supreme Court the question of whether, under Florida's Uniform Fraudulent Transfer Act (or FUFTA) there is a cause of action for aiding and abetting a fraudulent transfer when the alleged aider-abettor is not a transferee. The Supreme Court's unanimous answer in Lewis B. Freeman, etc. et al., v. First Union National Bank (decided January 29, 2004) was an unqualified "No." After considering legislative intent, the Supreme Court stated, "There is simply no language in FUFTA that suggests the creation of a distinct cause of action for aiding-abetting claims against non-transferees. Rather, it appears that FUFTA was intended to codify an existing but imprecise system whereby transfers that were intended to defraud creditors were to be set aside." The Court further stated, "Consistent with this analysis we conclude that FUFTA was not intended to serve as a vehicle by which a creditor may bring a suit against a non-transferee party's alleged aiding and abetting of a fraudulent money transfer."

This unanimous decision impacts all attorneys, accountants, bankers, and any other person who provides services to people transferring their assets. Freeman v. First Union is another milestone in the ongoing balancing of creditor remedies and debtors rights under Florida law.

Offshore Trusts

Offshore trust planning is a highly-publicized method of asset protection. Offshore planning involves establishing legal entities in favorable foreign jurisdictions under the control of trustees who are neither United States citizens nor persons having a business presence in the United States. The purpose of offshore planning is to remove legal battles with creditors to jurisdictions beyond the reach of the United States courts. Offshore planning works, foremost, when an offshore jurisdiction does not recognize judgments rendered by U.S. courts. In order for judgment creditors to reach assets located in such jurisdictions, a creditor must start over and reinstitute the lawsuit against the same defendant in the foreign court system.

The second advantage of offshore planning is that favorable offshore jurisdictions have relatively short statutes of limitation on fraudulent transfers. Domestic asset protection is often vulnerable to a creditor's allegations that the debtor has transferred assets, or has recently converted a nonexempt asset to an exempt asset, in an effort to defraud or delay creditors' collection. Most states have four-year statutes of limitations, which means that a creditor's attorney can attack any asset transfers up to four years after the transfers took place. Favored offshore jurisdictions have two-year statutes of limitation on fraudulent transfers. The shorter statute of limitations makes it easier for debtors to defend creditor challenges of their asset protection planning. The favorite legal tool involved in offshore planning is the offshore asset protection trust which otherwise resembles a typical U.S. trust. The offshore trust is a "self-settled trust" where the settlor and the beneficiary are one and the same. In an offshore asset protection trust, the trustee is nominated by the settlor and the trustee is either an individual who is not a U.S. citizen or a trust company with no U.S. offices or affiliation. Most often, an offshore asset protection trust will have additional people serving as trust advisors or trust protectors. These are individuals not under the settlor's control who have powers in the administration and protection of the trust and its assets but who have no beneficial interest in trust property. As a practical matter, the most important decision in forming an offshore trust is the selection of a trustee. The offshore trustee can be a bank or a lawyer in another country. The trust plan works best where the trustee is professional, reliable, and most importantly, willing to defend the offshore trust against attacks initiated by creditor attorneys.

Offshore asset protection trust plans have been successfully attacked by recent court decisions. If the settlor retains control over the appointment of the offshore trustee, or if the trust protectors or trust advisors have the power to remove and replace the offshore trustee, a court may force either of these parties to dissolve the trust. If they refuse to obey the court, the judge can hold the settlor, trust advisor, or trust protector in contempt of court and can incarcerate them until they comply with the court's order. An offshore trust will be most effective if the debtor/settlor is willing to relinquish all control over the offshore trust and the offshore trustee, and if all parties to the trust other than the settlor are outside the jurisdiction of the United States. Offshore asset protection trusts are not designed to reduce or avoid U.S. income tax.

OFFSHORE ASSET PROTECTION - Nevis LLCs

Limited Liability Companies

Florida limited liability companies (LLC) are a popular business planning tool. Many lawyers use the LLC as an alternative to Subchapter S corporations as the preferred legal entity for new businesses. Asset protection attorneys also use the LLC as a legal tool for domestic asset protection planning. Membership interests in a limited liability company are not exempt from execution or attachment by judgment creditors, but Florida law gives creditors limited remedies against a debtor's LLC interest. A judgment creditor cannot attach an LLC member's interest. A judgment creditor cannot seize assets owned by the LLC to satisfy a judgment against any one of the LLC's owners. In a properly drafted LLC agreement, the creditor has no rights to inspect the books and records of the LLC.

Under Florida Statutes, a creditor's remedy is limited to what is known as a "charging lien" against the LLC's cash distributions. In the event the LLC manager chooses to make no distributions, the member's creditor gets nothing. There is an IRS revenue ruling that held that in the event an LLC has taxable income allocated to a debtor/member, but where the LLC makes no distributions which are attachable by a charging lien, the member's creditor is responsible for his income tax liability to a member even though the creditor receives no distributions by virtue of his charging lien. A Florida creditor's limited rights under a charging lien, together with this income tax liability, makes creditors reluctant to attack a member's interest in a limited liability company and makes the Florida LLC an effective asset protection planning tool.

A limited liability company agreement with effective asset protection features is a complicated legal document which should be drafted by a Florida lawyer experienced in Florida asset protection law.

Nevis Limited Liability Companies

Establishing an LLC entity in an offshore jurisdiction gives another layer of asset protection. The Island of Nevis, in particular, has enacted favorable LLC laws. Most important, Nevis, like Florida, permits a single-member limited liability company, and Nevis law also establishes a charging lien as a creditor's exclusive remedy to attack a debtor's LLC ownership interest. A transfer of assets by a U.S. citizen to an offshore single-member LLC does not have any adverse tax consequences otherwise associated with transfer of assets to other offshore entities. To attack a Nevis LLC interest, the creditor has to apply in a Nevis court for issuance of the charging lien. It is unclear whether a Nevis court would even recognize a Florida judgment giving rise to a creditor's request for a charging order. Officials in Nevis have told me they know of no instance where a U.S. creditor has obtained a charging lien in Nevis to enforce a U.S. judgment.

Under Nevis law, the manager of the LLC does not have to be a Nevis resident or a Nevis business organization. A Nevis LLC's manager may be the debtor/member himself or any other individual located either in the United States or a different foreign jurisdiction. A debtor serving as LLC manager has substantial control over the Nevis LLC and to physically maintain assets anywhere in the world. A Nevis LLC can own assets in the United States, Nevis, or anywhere else in the world. For example, a Nevis LLC may have a Florida bank account, or if appropriate, it may open an offshore account in Nevis or another popular banking center such as Switzerland.

A debtor serving as manager of his own Nevis LLC maintains control over LLC assets, but he does not have the best asset protection. A Nevis LLC provides it optimal protection if the debtor appoints as either initial or successor manager an individual or company outside of the United States. No U.S court has jurisdiction over a foreign manager. The foreign manager will have control over all Nevis LLC assets. An effective LLC operating agreements provides that the foreign manager cannot be removed by the debtor/member. It is critical that the U.S. debtor be willing to trust a foreign LLC manager if an aggressive creditor threatens to attack a Nevis LLC. Some debtors have friends or relative live in foreign jurisdictions whom they appoint as successor managers. Other U.S. debtors must exercise their own due diligence to investigate and interview offshore companies that provide LLC manager services. There are many reputable companies, but each person needs to take the time to interview companies in which they may trust control over assets transferred to the Nevis LLC. You should not rely solely on referrals from your friends or your professional advisors is selecting an offshore manager for a Nevis LLC.

A Nevis LLC may require filing of additional tax forms with the IRS. For example, a single member Nevis LLC must file IRS Form 8832 to be a "disregarded entity" although domestice LLCs are "disregarded for tax purposes by default. Although a Nevis LLC should have no effect on U.S. income tax, people should consult their CPA regarding the filing tax reporting forms after setting up a Nevis LLC.

BUSINESS PROTECTION

Asset Protection for the Business Owner

Asset protection has become an important part of business planning fueled by the perception that jury awards and judicial decisions are arbitrary and irrational in both assessment of liability and magnitude of damage awards. Lawsuits are especially are a problem for small, closely held businesses which do not have sufficient resources to defend expensive commercial litigation or pay large judgments. Many people contemplating a new a business want to know what type of business entity provides the best protection from creditors. Likewise, established financially successful businesses are concerned about protecting business assets from frivolous lawsuits.

In the first place, a business may be sued directly in the conduct of its business operations for its own debts and actions. Examples include a foreclosure action brought by one of a business's secured lenders, a lawsuit against the business for breach of contract, or a suit based on an intentional act by one of the business employees. A judgment against a business would jeopardize all assets owned by the business including all of its business real estate, equipment, inventory, accounts receivable, and leasehold improvements.

A business owner can help protect business assets by encumbering these assets with perfected secured debt, such as a mortgage or a business line of credit. When a bank gives a business entity a standby line of credit, the bank will require a security interest on all business assets, including real estate, inventory, equipment and cash, to secure the business's repayment of any loan. The bank will file a mortgage or UCC-1 to perfect the priority of its security interest in the pledged assets against subsequent judgment creditors. Any subsequent judgment creditor would have to repay the bank the full outstanding balance of the bank's secured loan before the creditor could begin to attack business assets. Withdrawing borrowed funds could subject the owner to tax liability.

Alternatively, a business owner may be sued personally for the owner's personal actions and debts outside any particular business. For example, if a businessman were unable to pay a secured debt which he had personally guaranteed, the judgment creditor could obtain a personal judgment against the businessman based on the guarantee. Similarly, if a businessman entered into a new venture with a partner, and as a result of a dispute the partner sued successfully, the partner's judgment would jeopardize all of the personal assets of the businessman and his family.

The personal judgment would also expose any stock the businessman owned in a corporations including stock in his own, closely held business Corporations, although historically a popular form of small business, are a relatively poor asset protection entity. Although corporations shield business owners personally from liability incurred by their corporation, the owner's stock in his corporation is vulnerable to his personal judgment creditors. A personal creditor could attach the businessman's stock in any and all of the owner's corporate businesses to satisfy a money judgment. Once a creditor obtained the businessman's shares in his own corporate business, the owner/debtor would lose all equity in that corporate business, and more importantly, the creditor would become a principal shareholder and could disrupt corporate operations.

A limited liability company is the preferred business entity for asset protection purposes. The LLC offers the same corporate shield as the traditional business corporation so that judgments entered against the LLC will not threaten the owner's personal assets. More importantly, the owner's equity, or membership interest, in a limited liability company is less vulnerable to personal judgments than is stock in a corporation. An LLC membership interest is not an exempt asset under Florida Statutes, but a creditor's ability to collect a judgment from the LLC is limited by Florida Statute § 608.433. Under that Florida statute, a creditor with a judgment against a business owner cannot not seize the owner's LLC membership interests and cannot attack cash or any other assets owned by the LLC. The same statute gives the creditor the right to obtain a charging lien against the owner's LLC interest which lien gives the creditor a right to any distributions of cash or property that the LLC distributes to the debtor member. Delaware Series LLC

Many corporations own and operate more than one business, and likewise, many individual real estate investors own multiple properties legally titled under a single name or business entity. A problem with "single-pot" ownership of multiple businesses or property is that any legal liability relating to one business or property jeopardizes all other assets. Therefore, most owners of related businesses and real estate investors with several properties seek to separate ownership so that lawsuits against one business or one property will not jeopardize the owner's other investments. Traditionally, liability segregation meant setting up new and different business entities to own each business or each property. As businesses grow, multiple entity ownership can become complicated and expensive.

The Delaware legislature created a new type of legal entity which aims to solve this planning problem by permitting a single limited liability company to own multiple subsidiary limited liability companies each of which wons a single-asset business. This new entity is called "The Delaware Series LLC." Although a Series LLC must be created in Delaware, it can register to do business or own property in any other state. This innovative concept allows one LLC to establish separate series, or units, under the same LLC umbrella. Each unit of a Series LLC can own distinct assets, incur separate liabilities, and have different managers and members. A Series LLC pays one filing fee and files one income tax return each year.

Under Delaware statutes, liability incurred by one unit does not cross over and jeopardize assets titled in other subsidiary units of the same Series LLC. Although the same liability isolation can be achieved in any state with multiple entities, the Delaware Series LLC, in theory, offers superior and more economical asset protection under a single roof. There are several practical applications for a Delaware Series LLC. One such use is ownership of multiple parcels of real property in separate series within a Delaware Series LLC. This is less expensive then creating, filing, and maintaining several different LLCs to segregate property ownership. Second, an operating business could benefit from a Delaware Series LLC if the business owns real estate used in its operations. If the business were formed or merged into a Delaware Series LLC, one series could own the real estate and a different series could operate the business. Liability incurred by the business operations, in theory, would not jeopardize the real estate. In addition, there should be no sales tax due on rent paid by the operating series to the real estate series. Another possible benefit of a Delaware Series LLC is the ability to transfer assets among related businesses without income tax on built-in gain or liability for real estate transfer taxes.

Given the protection possibilities and planning flexibility provided by Delaware's Series LLC statutes, one might expect to see Florida's business landscape covered with innumerable Delaware Series LLCs registered to do business in Florida. Yet, Delaware Series LLCs remain relatively uncommon in Florida and other states. There are two principle reasons for this incongruity. The first reason is uncertainty about how a Delaware Series LLC will be taxed for federal income tax purposes. A recent article by the prestigious and widely-followed BNA Tax Management Service, Tax Management Memorandum, Vol 45, No. 4, February 23, 2004, concluded that the lack of clear federal tax standards for a Series LLC with multiple members restricts adoption of this potentially useful business entity. The second reason is that the asset protection and planning advantages of the Series LLC are only theoretical, and unproven, in actual asset protection combat. No Florida state court and no Florida bankruptcy court has yet examined the asset protection effectiveness of a Delaware Series LLC. Therefore, business people, investors, and advisors should proceed cautiously before relying on this new device to protect their wealth from creditors pending further court interpretation.