Category Archive: Asset Protection

Florida’s Fraudulent Transfer Law

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As a caveat to all of the recommendations outlined herein, there is a risk that a transfer designed to reduce the risk of claim by a creditor could, by itself, be deemed a fraud on all creditors.

This is particularly true when a judgment has already been obtained by a creditor or when a claim is threatened or a trial is pending.  In general, any creditor of a transferor of real or personal property may seek.

Florida has recently adopted the comprehensive Uniform Fraudulent Transfer Act and this Act should be consulted before any action is undertaken by the individual or his or her advisors (Florida Statutes Chapter 726.01 et. seq.).

While a complete examination of the law regarding ‘fraud on creditors’ is beyond the scope of this Article, in general, the further in advance of any potential claim the measures outlined herein are undertaken, the better the chance of the transfer not being voided by a court of law.

Individual Retirement Plans & Disability Insurance

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Annuity and life insurance products (within certain limitations) can be used not only as personal investments but also for pension plan purposes.

Thus, Individual Retirement Account plans, as well as defined contribution, profit sharing and KEOGH Plans could invest part or all of the plan assets in annuities for the participant.

If each participant were the beneficiary of his or her own annuity contract, he or she should be offered same protection from creditors attaching the portion of his or her pension account which is so invested.

Disability income benefits, unless specifically created for the benefit of creditors, are exempt from execution (Florida Statutes Chapter 222.18) when he or she becomes disabled, one facet of proper estate and financial planning is to have the necessary resources to protect the individual and his or her family in the event of disability.

Disability insurance can provide for an individual’s income needs despite any creditor claims existing at the time of or subsequent to the disability period.

However, disability payments already received by an individual are not exempt.

As described previously, converting already received funds into protected assets may afford additional protection.

Joint Purchase & Remainder Interests

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Although not a trust, the Joint Purchase Concept is similar to a remainder trust in its protective effect.

Here, the individual purchases a life estate in the asset (e.g. stocks, bonds, real estate or other income producing investments) and the children of the individual (or another third party) purchases the remainder interest in the property at the same time (each paying full value for the property interest purchased based on current Internal Revenue Service tables).

Once again, while the life estate held by the at-risk individual may be reachable by his or her creditors, the remainder portion should be protected.

A sale of a remainder interests in limited circumstances may also be utilized whereby the individual sells, for its fair market value, the remainder interest in an asset he or she already owns to his or her children (or other third party) while retaining the life estate.

This would have a similar result as the joint purchase of an asset in terms of added protection of the property.

Formerly, estate tax advantages were also obtained from the use of a joint purchase or the sale of a remainder interest.

However, with the enactment of Section 203(c) of the Internal Revenue Code, these advantages are no longer available.

Trusts, Sales, and Gifts to Protect Assets (Part 2)

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Certain other types of trust, particularly when coupled with spendthrift language, may protect certain assets from the claims of creditors.

These include ‘remainder trusts’ and ‘trust-like arrangements’ such as Joint Purchase Agreements (which may or may not be structured as a formal trust).

With a remainder trust, the at-risk individual is the beneficiary of only the life estate of the asset held by the trust, while his or her family members or other selected individuals are designated as beneficiaries of the remainder interest.

Therefore, while a creditor may seek to levy on the at-risk individual’s ‘life estate’ in the property, the ultimate ownership of the property will pass to the beneficiaries selected by the individual, unaffected by such creditor claims.

Charitable Remainder Trusts may also be used to protect assets for those individuals who have charitable interests.

For example, assets may be placed in a trust whereby a fixed income is received by the individual for each year for a term of years or for the individual’s lifetime or joint lifetimes with his spouse or children.

The individual’s creditors cannot reach the principal of the trust and, if his or her creditors attempt to reach the income, then a ‘spray’ provision in the trust can authorize the Trustee to pay the income of the trust to spouse or children.

Trusts, Sales, and Gifts to Protect Assets (Part 1)

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Many times a trust vehicle is utilized to protect assets from the claims of creditors.  

A trust cannot generally be established by a debtor which puts the debtor’s property beyond the reach of creditors yet gives the debtor the use of the property for life.

However, a trust is frequently created with ‘spendthrift’ language which provides that the income and/or principal of the trust cannot be attached by creditors of the beneficiary of the trust.

Florida recognizes spendthrift trust provision.

While a spendthrift clause may be added to a trust established to benefit the at-risk individual and others, such individual may find that the trust assets are not protected from the claims of creditors, at least to his or her portion of the trust.

This is frequently true even though the trust is irrevocable.  (Spendthrift provisions are, however, of some benefit in protecting pension assets.)

Certain other types of trust, particularly when coupled with spendthrift language, may protect certain assets from the claims of creditors.

Keep Wages and Salary Earnings Safe from Creditors

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If the new resident receives wages or salaries as a substantial source of his or her income, it is recommended that the separate ‘wage account’ be established to which payroll contributions would be made for the benefit of the individual by the employer.

This account would, in essence, be established to fund the salary draws for the individual and, as such, would be entitled to statutory exemption under Florida law.

The Statute provides, in material part, that exemption of wages from garnishment shall apply to any wages deposited in any bank account maintained by the debtor when said funds may be traced and properly identified as wages’ (Florida Statutes Chapter 222.11).

This would give a measure of protection to this amount of money regardless of the filing of any claim against the individual.

Protect Stocks, Bonds & Other Assets from Creditors

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In Florida, stocks and bonds may be protected from the claims of creditors of one spouse in much the same way that the personal residence is protected (with the exception of the Homestead Exemption) because Florida law, as discussed previously, makes immune from the claims upon one of the spouses the property held by both spouses as tenants by the entireties.

As an alternative, the at-risk individual could also gift the assets to his or her spouse, or, as previously mentioned, transfer the assets to the spouse’s Living Trust.

As with all gifts, consideration must be given to the Federal/state gift tax laws which apply to all transfers without sufficient consideration.

In Florida, however, an individual may make unlimited gifts to a spouse without any liability for payment of gift taxes.

Protection of Other Assets:

For other holdings, such as non-homestead real estate and other personal assets and investments, the individual may consider the establishment of a Florida Family Limited Partnership in which the at-risk individual would serve as sole General Partner and own only a small interest as Limited Partner with his family holding the balance of the Limited Partners’ interests.

This would offer the at-risk individual control in the overall entity (as General Partner) yet limit his or her exposure to his or her interest in the future profits in the venture.

Florida Limited Partnership law permits only a ‘charging order’ to be entered against a Limited Partner’s interest, thus entitling a judgment creditor to only profits actually distributed by the Partnership to a Limited Partner (Florida Statutes Chapter 620).

A provision in the Florida Limited Partnership document would grant the General Partner the discretion to make (or not to make) income distributions.

It is further recommended that the spouse’s interest be held as Settlor of a Revocable (Living) Trust to provide additional protection for his or her benefit as to the Trust would provide for discretionary income and principal distributions to the at-risk individual upon the spouse’s premature death.

Appropriate ‘spendthrift’ provisions would be made a part of this Trust.

Protect a Florida Residence from Creditors (Part 3)

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Finally, the third most common method of protecting a personal residence is to convey it to the individual’s spouse.

This affords protection since the individual’s creditors generally cannot reach the spouse’s assets. This would offer the at-risk individual control in the overall entity (as General Partner) yet limit his or her exposure.

To remove assets even further from the claims of an individual’s creditors, the residence may be placed in the spouse’s Revocable (Living) Trust.

And, in the event of the spouse’s death prior to that of the at-risk individual, a trust should be established providing the individual with the right to occupy the personal residence for and during his or her natural lifetime with ultimate ownership passing to family members or a trust established for them.

With regard to the contents of the home (furniture, jewelry, silverware, etc.), it is recommended that the at-risk individual execute a Bill or Sale conveying all of his or her right, title and interest in and to that property to his or her spouse, absolutely.

Protect a Florida Residence from Creditors (Part 2)

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The second most common method of protecting the personal residence is by using the Florida Homestead Exemption.

(Article X, Section 4, Constitution of the State of Florida).

Within certain limitations as to the size of the property (1/2 acre of a municipal homestead or up to 160 acres of a non-municipal homestead), the personal residence of a natural person titled in his or her name (individually) is generally exempt from the claims of creditors in accordance with the Florida Constitution.

There is no limitation as to the value of the residence.

Care must be taken when utilizing either the Homestead Exemption or the tenants by the entireties method of ownership to avoid an individual ‘signing away’ of his or her protection pursuant to specific terms of a contract, mortgage or other agreement, although this ‘signing away’ will not reduce an individual’s protection against the claims of creditors.

To ensure receiving the homestead protection, the individual should execute a special Homestead Affidavit, Designation and Acknowledgment which is recorded in the real estate record of the county in which the Homestead property is located (Florida Statutes Chapter 222.01).

Protect a Florida Residence from Creditors (Part 1)

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Once an individual arrives in Florida, his or her first financial decision may be the purchase of a new residence.

There are three methods to protect residence from the claims of creditors.

The most common method is the ownership of the property as tenants by the entireties with the individual’s spouse.

Under the laws of Florida relating to tenants by the entireties, both spouses own the whole property together, and the surviving spouse succeeds to the ownership of the property (by ‘operation of law’) upon the death of the first spouse to die.

Florida law provides that property held as tenants by the entireties is immune (not exempt) from the execution for debts of any one individual owner.  This is because ownership of property in this way is considered to give each other full and individual ownership and control of the property.

This is true even if one of the spouses dies while subject to an existing creditor claim; i.e. the spouse will take the entireties property free from the claim of the other spouse’s creditors.

It is important to note that entireties property may not be subject to exemption if the claim is against both husband and wife jointly.

The only way such a situation may typically arise is if both parties guarantee a debt or obligation or if the two spouses are somehow related in the business or have committed a joint act giving rise to joint liability to the same plaintiff or creditor.

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