Asset protection is about protecting the “stuff” that you have worked so hard to accumulate. It sounds simple and yet the idea of protecting your stuff may mean very different things to different people. This article will attempt to simply this concept by first defining what asset protection is as a critical part of a complete Florida estate planning strategy. I’ll then offer an overview of various asset protection strategies used in Florida.
Even if you’re not a Florida resident or investor, I encourage you to read on because the concepts to follow will serve as an overview of the issues and options that are available for asset protection in your home state or other jurisdiction of your choosing.
To Protect is to Safeguard your Assets
For some, asset protection is as simple as keeping funds in the bank and using a safe deposit box. Others visualize offshore trust accounts and hiding assets in obscure foreign corporations. Your asset protection strategy will depend somewhat upon the nature and value of your stuff as well as your priorities and goals.
Defining Asset Protection in Florida
What is an Asset?
Before addressing specific methods of Florida asset protection, it is important to get clearer about what is an asset. I define an asset as everything you may own that has value. I also differentiate between “income producing” and “non-income producing” assets and this is simply a question of whether the asset is creating income for the owner. An important distinction is if something is not appreciating in value or creating income then perhaps it should not be considered an asset. It is your task to determine what constitutes an asset and thus what warrants asset protection for you.
An income-producing asset may be your ownership in a Florida business or a rental property. An asset can also be (non-income producing) personal property such as a stamp collection or an antique car. Other assets may include funds in a bank account or investment account. You get the idea. This is the stuff that generates income and builds your net worth.
Why Asset Protection?
The “somewhat obvious” reason why an asset protection plan is needed is simply that we live in a society with a legal environment that tends to favor creditors.
Who are Creditors?
A creditor in today’s legal environment can be someone “off the street” who decides to sue you for whatever reason. For a business owner, a creditor may be anyone who enters your place of business. McDonald’s Restaurants found this out years ago with the infamous “hot coffee lawsuit,” Liebeck v. McDonald’s Restaurants, in which an elderly customer won a large judgment by jury (2.8 million) after asserting that the coffee she spilled on herself was unreasonably hot. Although the judge in that case ultimately reduced the verdict and the case was settled, the “hot coffee” fact pattern was repeated recently when a police offer filed a similar lawsuit against Starbucks Corporation. A “slip and fall” can easily result in a prolonged, expensive lawsuit and the real problem is that plaintiffs’ lawyers are on the hunt for clients, and they often do not charge any upfront fees to take a case.
Plaintiffs’ lawyers operate on a contingency basis where they collect a portion of the verdict or settlement as their fee and this fee usually ranges between 25% and 45% of the total award of damages to the client. The bottom line is that you are easy to sue, and these lawsuits are tough to defend, often requiring a $5000.00 retainer to the defense lawyer just to get started.
Worse yet, all too often, a plaintiff’s lawyer will take a case to try to leverage a quick settlement rather than attempt to litigate it. However, to you, the plaintiff’s ultimate goal is inconsequential because they can still file a complaint against you and you’ll still be required to hire a lawyer to file a legal defense to a lawsuit that may be entirely frivolous. If you fail to act and/or are not successful in defending a lawsuit, you may well end up with a large judgment (filed of record against you) that may be enforced for 20 years in many jurisdictions.
A creditor may also be a bank, business partner or individual who loaned you money or entered into another kind of business deal with you. Promissory notes and mortgages are usually drafted heavily in favor of the lender creditor, and any kind of legal dispute will be extremely expensive.
There are two creditors that warrant a special category that I define as “super-creditors.” The super-creditors earn this definition because they pack an extra punch due to their unique position to get your assets under the current laws. The super-creditors are a spouse in a divorce and the IRS. The latter, IRS, is somewhat self-explanatory because, as a federal entity, the ability of the IRS to pursue assets is somewhat unlimited when compared to your “non-super” creditors, including the ability to place liens upon homestead property. Spouses in a divorce are also super creditors because divorce actions require full disclosure of all assets and the spouse generally is entitled to ½ of all the marital assets depending on the local laws.
When any type of creditor obtains a judgment, they record it in your county of local residence and can then seek to “attach” the judgment to your assets in the jurisdiction. Further, this judgment can then be filed in other jurisdictions where other assets are located, and this can lead to liens being attached to assets and forced sales to pay the judgments. Judgments can also lead to wage garnishments and other unpleasant circumstances.
It is important to understand that asset protection law is not about “hiding assets” from the IRS or anyone else or about being sneaky in defrauding creditors. On the contrary, asset protection is about identifying the strategies available under applicable laws that allow for the maximum protection of your assets in the event a plaintiff or other party brings a legal action against you.
So, considering what judgment creditors can do to try to get your assets, and remember that assets are defined as the stuff of ours that is either income-producing or appreciating, the next question becomes how to utilize the most effective strategies available in order to protect these assets. That is the goal of this article—to give you a working definition of asset protection and the strategies available, so you can become empowered to consider the available strategies that may be appropriate for your specific circumstances. You also need to understand your options and why it may be too late to protect your assets from certain active creditors due to what is called “fraudulent transfer laws.” You need to create an asset protection strategy while things are good and the sun is shining. In a best case scenario, being proactive is about taking protective measures before entering into any business contracts, loan agreements, real estate transactions or landlord-tenant agreements or any other liability producing ventures.
So, the kinds of liability in Florida that we are trying to protect against are:
- Plaintiffs’ lawsuits
- Divorce lawsuits
- IRS Tax actions
- Business lawsuits
- Real estate/landlord tenant lawsuits
- Creditor/loan repayment lawsuits
Rather than addressing these 6 liability types individually, the strategies to be discussed should cover them all with some additional recommendations concerning our super-creditors, the IRS and the aggrieved spouse in a divorce action.
Asset Protection Strategies in Florida
The options/strategies that are available for asset protection in Florida are:
- Homestead or personal residence protection
- Annuities and life insurance
- Qualified accounts (IRAs, 401ks, and 403bs) and wage accounts
- Domestic business entities (LLCs, corporations and limited partnerships)
- Marital agreements (pre-nuptial and post-nuptial)
- Domestic trusts (revocable (living), DAPTs, land trusts, other irrevocable trusts)
- Offshore trusts and offshore business entities
So, as a strategic asset protection plan, options 1 – 7 from the strategies above move from the most common options for average folks at number 1 to the most expensive and least common approach at number 7. While the above are protected classes of assets, there are some classes of assets that offer little or no protection, which are:
- Checking accounts, savings accounts and CDs
- Non-qualified investment accounts (mutual funds or trading accounts)
- Real property held in an individual’s name (not a personal residence)
- Business owned as sole proprietorship or general partnership
- Personal property held in individual’s name
Florida Homestead Protection
Whether the family residence is protected from creditors will largely depend upon the state’s laws and the amount of protection that is allowed. The level of protection offered for the family home, or homestead in Florida, is among the best in the country, possibly second only to Texas. In Florida, it is important not to confuse the homestead tax exemption from the exemption that is applicable for asset protection purposes both under the state laws as well as the federal bankruptcy laws in that state. The state of Florida offers 100% protection against the forced sale of a home. Homestead protection is guaranteed under Article X, Section IV of the Florida Constitution and it covers 100% of the real property value of up to 160 contiguous acres in any county in Florida or up to ½ acre in a municipality. Comparing the state of Texas, it offers even greater protection of 10 urban acres and 200 rural acres, and this protection is strictly enforced by the state courts. On the “minimal protection” end of the spectrum, the state of Virginia only allows real property owners to exempt $5000 of the value plus $500 for each dependent or a maximum of $10,000 per married couple. Many states offering an “in between level” of protection allow approximately $70 – $170,000 of homestead real property value to be claimed as exempt from creditors in a state action or bankruptcy proceeding.
So, the effectiveness of this strategy will be largely based upon your local state’s laws, or you might consider relocating your residence to Florida (or Texas). Another important point is that there are exceptions to Florida homestead protection that generally include the default of your home mortgage because the mortgage is secured by a security interest in the home. Homeowners’ association actions for the community in which the homestead is located are also often secured by the home. Other exceptions may include IRS tax liens and, of course, divorce actions by a spouse (our super-creditors), both of which may be imposed on a Florida homestead.
Florida Asset Protection for Annuities and Life Insurance
An annuity is a financial product created by the insurance industry that provides a rate of income at a contractually agreed rate. Annuities can be either immediate or deferred, and the cash value is protected under most state statutes with the amount of protection varying based upon the state laws. Annuities and Life Insurance are opposite sides of the same coin. Whereas an annuity provides a benefit during the policyholder’s lifetime, life insurance is purchased primarily for the death benefit to be available for the policy holder’s beneficiaries. So, if somebody dies, the insurance company pays out on life insurance but saves on the annuity and vice versa and in this way the insurance company is hedging.
The state of Florida offers a high level of protection for annuities and life insurance. Here again, the strictest protection for annuities and life insurance is found in Texas, which essentially offers total protection for these policies. In Florida and a number of other states, the protection is available if the proceeds are for the benefit of another and not used for the insured. In other states such as California, there are strict limits, such as only protecting up to $9,700 for an individual or $19,400 for a married couple. Many states also consider whether the policy is matured and for the benefit of only the policy holder or primarily for the beneficiaries, thus warranting greater protection.
Florida Asset Protection for Qualified Accounts [IRAs and 401(k)s]
Qualified investment accounts that receive special income treatment by the IRS also receive asset protection under most state laws. Florida offers a high level of protection for these accounts also. For example, Florida statutes provide protection for “inherited IRAs” so that they can be claimed exempt from creditor actions, even in bankruptcy settings. However, it still might wise to consider a IRA Trust in Florida.
The reasoning for heightened asset protection of qualified accounts is that they generally are for retirement purposes. Qualified accounts that are exempt under state laws from creditor attachment include IRAs, Roth IRAs, and Keogh plans (tax deferred pension plan geared to self-employed individuals). There are varying rules that apply to the exemption of these accounts similar to the varying state laws pertaining to homestead protection. These accounts are generally protected because the IRS is interested in preserving these accounts for future taxation and the protection often applies in both the bankruptcy court (federal) as well as the state’s courts. Some states only protect qualified accounts that are not for the benefit of the debtor, whereas other states do not impose this condition.
Florida Asset Protection for Business Entities
Whereas the rules concerning homestead protection and qualified accounts are somewhat “cut and dry” it gets a bit more interesting in the following sections because contractual language may be used to “enhance” your asset protection.
When we’re talking about Florida business entities, we’re talking about entities that are based in in Florida. Common types of business entities are limited liability companies, corporations, and to a somewhat lesser extent limited partnerships. Sometimes the various entities are multi-layered or combined to accommodate certain strategies.
Florida Asset Protection for Limited Liability Companies
A limited liability company (LLC) in Florida is perhaps the most flexible and accessible way to provide asset protection for “non-qualified” assets or assets not covered by one of the above strategies. Every state offers the ability to create an LLC in that state, and the process is essentially the same in every state, which is to file articles of organization with the secretary of that state. The articles will specify some variation of who the initial “members” and “managers” are and who the “registered agent” is. The short primer on LLCs is that the members are similar to the shareholders of a corporation, and the managers are similar to the officers. Generally, when operating an LLC, one should not confuse the terminology with that of a corporation, to be discussed, although some jurisdictions allow the appointment of a president and secretary of an LLC. An LLC can typically be “member managed” or “manager managed” and this choice depends on whether a “non-member manager” is a possibility. Many family LLCs are member managed because only members will be managers and often everyone gets a vote.
Although most people think of LLCs as used for operating a business or investment real estate, LLCs can also be used for holding other assets like art, antiques, boats, stocks, and bonds. Because this is the case, many states have endeavored to create a body of asset protection laws that favor LLC protection, and thus serve to protect the LLC membership owners. This concept means that the assets that are owned by the LLC would also be protected from creditors.
If there is a chink in the armor of Florida asset protection, the Florida LLC is it. 2010, the Florida Supreme Court decided in the Olmstead case that a creditor would be allowed to “charge the interest” in a single member Florida LLC, which set precedent. After that decision, the Florida Bar scrambled to offer “patch legislation” to clarify the rights of creditors concerning Florida LLCs. The outcome for the Florida LLC was less than exciting and leaves room for a Florida creditor to access a single member LLC in Florida within certain parameters.
Florida Asset Protection for Corporations
A Florida corporation may be described as a “more established” and “more formal” older brother to the Florida LLC. A corporation in Florida is filed similarly to an LLC in that articles of incorporation are filed with the secretary of state in the state of incorporation. Every state provides for the filing of corporations, as it is an important incentive for local businesses as well as an important revenue stream.
For a traditional or large organization, a corporation offers the most advantages due to the tax laws and the ability to sell securities, go public, etc. The downside is that, in many jurisdictions, the corporation is also easier for creditors to attack because corporate stock has traditionally been subject to judgment liens and creditors have historically been able to force the sale of corporate stock in order to satisfy judgments. However, in Florida, the state legislature has undertaken efforts to update corporate laws in order to provide more asset protection for corporations akin to the charging order protection discussed above for LLCs. Adding “charging order type protection” for corporations in order to make corporations more like LLCs from an asset protection standpoint appears to be a trend in state law changes.
Florida Asset Protection for Limited Partnerships
The Florida limited partnership (LP) has historically been well known in real estate investor circles because it allows one person to control the partnership (the general partner) and other partners to contribute funds and participate in profits (the limited partners). Traditionally, this structure has also placed all of the liability of the general partner for decisions made and actions taken on behalf of the partnership.
An LP is filed in the state of organization, similar to LLCs and corporations, by filing a certificate of limited partnership. The partnership may be governed by a limited partnership agreement in the same way that an operating agreement is utilized for an LLC.
The LP was popular in the 1980s when tax sheltered investments were extremely popular, but all of this changed when President Reagan ushered in changes to the U.S. tax code. The current trend in Florida is to use LLCs instead of limited partnerships because a controlling partner doesn’t need to assume unlimited liability and all of the other purposes of a limited partnership may be accomplished by allocating different “classes” of membership interest in the LLC. LLCs are often much less expensive to file than a limited partnership.
Florida Asset Protection and Marital Agreements [Pre-Nuptial and Post Nuptial Agreements]
A marital agreement, also known as a prenuptial agreement or postnuptial agreement in Florida, an important Florida asset protection strategy that is not often considered and yet is critical because an aggrieved spouse, as stated, is one of two “super-creditors.” A Florida marital agreement is divided into two categories “pre” or “post” depending upon whether they are signed pre or post (before or after) the marriage ceremony. “Nuptial” refers to marriage, so the distinction is whether the agreement was executed before or after the wedding. Prenuptial agreements tend to be more popular and probably more enforceable because they are entered into as part of the marriage process and not as an afterthought. Either one is an asset protection strategy because, as in the case of all other strategies discussed, it is a way to allocate the risk of marital fallout before any issues arises. Ideally, any marital agreement should be implemented at the inception of a marriage or shortly thereafter as opposed to years later.
For any marital agreement in Florida to be enforceable, a few minimum requirements should be met which are:
- Full disclosure of all assets by both spouses and a full financial statement attached to the agreement.
- Independent review by two attorneys (from different firms) who represent each of the spouses.
- No evidence that the agreement was obtained by duress.
The idea is that both parties have a chance to deliberate, seek the advice of counsel and confirm the consequences of signing any marital agreement.
The requirements of full disclosure and observance of legal formalities surrounding marital agreements are for a good reason. Once signed, these agreements do not have a shelf life and would arguably impact a divorce after a 30-year marriage. The other thing to know is that a spouse who signs a nuptial agreement may be waiving substantial financial rights such as ½ the marital home if owned prior to marriage or rights to investment accounts, alimony, etc.
For the above reasons, a Florida marital agreement can be a highly effective and important asset protection strategy, especially, in my opinion, where family fortunes and short-term marriages are involved.
Florida Asset Protection and Irrevocable Trusts
There are big differences between a Florida revocable trust vs. an irrevocable trust in Florida. It is important to remember the important distinction that a Florida revocable living trust offers the trustmaker no asset protection from creditors, whereas a Florida irrevocable trust can offer this protection. However, although there is NO asset protection from creditors for the trustmakers of a revocable living trust, a Florida revocable living trusts DOES offer asset protection for beneficiaries upon the death of the last surviving trustmaker because the revocable living trust becomes “vested” and irrevocable upon that death.
The genre of Florida trusts that are “irrevocable” and thus asset protected when they are established include the following types of trusts:
- Income only Medicaid trusts
- Wealth replacement trusts or irrevocable life insurance trusts in Florida (ILITs)
- Grantor retained interest trusts (GRATs and GRUTS)
- Charitable trusts in Florida (CRTs and CLTs)
The thing to know about Florida irrevocable trusts in the above list is that they are all intended for different purposes. Most irrevocable trust plans involve areas of advanced planning, such as estate tax planning in Florida, that requires the assistance of an experienced Florida estate planning attorney.
In general, irrevocable trusts in Florida are entities that are separate from the individual for tax purposes as designated by a separate tax id number. By definition, these trusts are difficult to change, once formed, and this independence from the individual is what allows the asset protection. These trusts have a defined, independent purpose (from that of the individual trustmaker) and all of this forms the basis for the asset protection of the trust.
Wealth replacement trusts in Florida a/k/a irrevocable life insurance trusts (ILITs), GRATs, GRUTs, and charitable trusts are irrevocable trusts that are often utilized more for tax planning than simple asset protection. However, these types of trusts are irrevocable and thus offer asset protection benefits.
Elder Law Asset Protection in Florida
Medicaid trusts in Florida or income only trusts are utilized for elder law asset protection, which often focuses on keeping family assets outside of the reach of Florida Medicaid and these are subject to the 5 year look-back period for Florida Medicaid transfers. There are many other elder law asset protection strategies that may be considered on a case by case basis if Medicaid qualification is needed.
Florida Asset Protection and Florida Land Trusts
Florida land trusts actually may be revocable or irrevocable (depending upon goals and preference) are a unique asset protection strategy that, as of this writing and to the best of this author’s knowledge, are available in Illinois, Florida, Texas, Arizona, Virginia, Ohio, Indiana, North Dakota and (possibly) California.
Land trusts in Florida essentially convert “real property interest” into a “personal property interest” by virtue of a contract between the land trustee and the trust beneficiary. The beneficiary of a land trust may be an individual or an entity such as an LLC. The idea behind a land trust is that the creditor may, once again, not reach an asset because it is in the hands of the trustee and the beneficiary has no immediate interest to record a lien upon or otherwise attach. According to Florida law, this land trust contract creates an “executory contract” in favor of the land trust beneficiary that serves as a protective barrier against predatory creditors.
After this broad overview, my hope is that you understand the key concepts necessary to explore your own Florida asset protection needs and formulate a plan that makes sense. As I’ve mentioned a number of the strengths of Florida asset protection, the laws and potential asset protection benefit vary from state to state. This attached chart provides a helpful overview of laws governing the protection of assets chart by state and asset category.
Wherever you are in this important process, I encourage you to seek professional legal counsel for this endeavor due to the complexity and importance of this area.
Steve Gibbs, Esq.