Florida Bar Health
Law Handbook 2007
THE
FLORIDA BAR’S HEALTH LAW HANDBOOK
A Publication of the Executive Counsel of the Florida Bar’s
Health Law Section
2007
CHAPTER 10
Jonathan Alper, Esq
ASSET PROTECTION
The
Need for Asset Protection
Asset protection is the process of insulating people’s
assets against attack by judgment creditors. A well-designed
asset protection plan builds a protective layer around the client's
estate and guards their wealth from creditor attack. Effective
asset protection for medical professionals starts with common
sense and involves a variety of tools. To start with, physicians,
like other business people, should avoid overly risky ventures
or into business deals that promise gains “too good to
be true.” Business arrangements with medical partners
and other business partners should be carefully considered and
well documented with competent legal advice. Next, risk management
planning arranges the medical business in a way designed to
control risk. Insurance is a basic asset protection tool including
an umbrella policy to cover automotive and homeowner liability.
After these basic steps, each person’s asset protection
plan is different depending on their individual assets, goals,
and risk tolerance. Some asset protection tools are legal tools
prepared by an attorney. Asset protection planning also involves
life insurance, annuities, and other financial solutions. Still
other asset protection tools are things the medical professional
can do for himself without professional help such as changing
registration of financial account. Attorneys must work with
a client’s tax advisors and financial professionals to
provide an overall effective asset protection solution suited
for the client. Most important, asset protection does not involve
either hiding assets or income tax protection. There are no
secrets in asset protection, and no one should expect that asset
protection will reduce U.S. income tax liability.
A physician or other professionals are subject to two types
of liability: “inside liability” and “outside
liability.” Inside liability is negligence or medical
malpractice. In the event of a malpractice claim, the physician
and his business are jointly and severally liable for the full
amount of the claim. “Outside liability” pertains
to a judgment entered against a physician for actions or liability
other than medical malpractice. As examples, a physician may
be sued personally if he guarantees a loan for a failed business
or if he has a dispute with a business partner, or if he commits
an intentional act such as employment discrimination. These
suits would result in a judgment against the physician personally
but probably not against the medical business. A judgment creditor
arising from outside liability could indirectly attack a physician’s
medical business if the creditor could levy upon his interest
in the business, and after seizing the stock, could try to close
the business. Additionally, the judgment creditor would attack
any investment assets titled in the physician’s individual
name.
Does Asset Protection Work?
It is difficult to make someone 100% asset protected, or “judgment
proof.” If one’s goal is to substantially improve
their creditor protection and to place the majority of their
assets beyond creditor attack, then asset protection success
is obtainable if done early and with the help of an experienced
attorney and financial advisors. Effective asset protection
increases the debtor’s negotiating leverage with his creditors.
The more difficult it is for the creditor to execute and collect
on assets, the more likely the debtor can negotiate a lower
settlement amount or persuade the creditor to not spend time
and money attacking his assets.
Asset protection planning is designed to protect against judgment
creditors who obtain money judgments in civil lawsuits. Besides
judgment creditors, there are other potential creditors in this
world including the IRS, other government enforcement agencies,
former spouses, and bankruptcy trustees, all being so-called
“super creditors.’ Asset protection planning is
much less effective against these super creditors because the
law gives these creditors more powerful collection tools than
those available to general judgment creditors.
Basis of Florida Asset Protection
Compared to other states, Florida has liberal and effective
asset protection laws. Our asset protection law is based in
several sources. Florida’s Constitution, our most fundamental
and important legal document, sets forth our most important
protections, particularly Florida’s well-known homestead
laws. Next, the Florida legislature over the years has enacted
many statutes each of which protects from our creditors various
types of assets and income. Finally, there are protections established
in Florida’s “common law”, or legal tradition.
Constitutional Protections : Homestead
In Florida, our home is truly a castle, a castle that is impenetrable
by creditors. Article X, Section 4 of the Florida Constitution
exempts homestead property from levy and execution by judgment
creditors. Florida courts have liberally expanded definitions
of homestead property to include more than just a traditional
single family house. Condominiums, manufactured homes, and mobile
homes are also afforded homestead protection. You do not need
to have fee simple title to a homestead property. Courts have
given homestead protection to a person who has any type of legal
or equitable interest in their principal residence. Homestead
property must be owned by a “natural person”. Owning
your home in a partnership or corporation forfeits homestead.
Ownership of your homestead in a self-settled, revocable living
trust is considered ownership by a natural person.
What makes Florida’s homestead protection such a powerful
asset protection feature are its unlimited monetary protection.
There is no dollar limitation on the value of residences protected
under the Constitutions homestead provisions. There is, however,
an important size limitation. The constitutional homestead protection
covers properties located on lots no greater than one-half acre
inside any municipality and up to 160 acres outside a municipality.
A homestead property on a large lot, greater than ½ acre,
which is subsequently brought into a municipality has grand
fathered protection.
The homestead rules are different in bankruptcy court. People
who file bankruptcy in Florida may find that their home is not
protected from the bankruptcy trustee. Under the new bankruptcy
law enacted in 2005, known as BAPCPA, a bankruptcy debtor claiming
Florida exemptions can protect unlimited equity in his homestead
provided he purchased the residence 40 months or more prior
to filing bankruptcy. If the same debtor purchased his home
within 40 months, the new law exempts up to $125,000 of equity.
Appreciation in value after purchase is not counted toward the
$125,000 bankruptcy limit, and married debtors are each entitled
to claim separate $125,000 exemptions for a total of a $250,000
exemption in joint bankruptcy cases. Additionally, if the debtor
injected cash in his home within the 40 months, such as by paying
down the mortgage or building a home addition, the amount of
investment made within the 40 months will not be exempt even
if he purchased the home 40 months prior to filing. The $125,000
homestead exemption limit applies only in bankruptcy cases.
The same person’s homestead is protected regardless of
its value in any state court collection proceedings outside
of bankruptcy.
Joint Ownership and Tenants by Entireties
Other than homestead, the most effective and widely used asset
protection tool is joint ownership between husband and wife.
Any two people can jointly own property. There are many forms
of joint legal title, and not all forms of joint ownership are
protected from the owners’ creditors. Many married couples
incorrectly believe that all their jointly owned property is
automatically protected from their creditors. This belief is
incorrect. Joint ownership with rights of survivorship offers
no asset protection. A creditor of either owner may seize the
interest the debtor owners holds in joint tenant property.
A special type of joint ownership between married couples is
called “tenants by entireties” (or, TE or T by E,
for short). Unlike joint ownership with rights of survivorship,
“tenants by entireties” ownership affords asset
protection benefits. A creditor of either spouse individually
cannot levy upon property owned jointly as tenants by the entireties.
Where both spouses are jointly indebted to a particular creditor,
that creditor can involuntarily seize TE property owned by the
two spouses. TE protection exists only if a creditor has a judgment
against only one of the spousal owners.
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. Not all assets can be practically
owned T by E. For example, many types of professional businesses,
can only be owned by people licenses in that profession. A single
licensed professional cannot own his business as tenants by
entireties with his unlicensed spouse. On the other hand, married
professionals can own their interests in their practices as
tenants by entireties.
TE ownership is attractive because it is the quickest and simplest
form of asset protection for married persons. TE ownership may
not provide the most secure asset protection over the long term.
First, a divorce immediately converts the T by E into a joint
tenancy between the two 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 tenancy
and vests the property solely in the surviving spouse. If the
surviving spouse has creditors, the protection afforded by the
entireties ownership is lost. Secondly, Tenancy by Entireties
creates problems in the areas of estate planning and estate
tax avoidance.
Whether a husband and wife own property as T by E or as some
other form of joint ownership depends on their intent. T by
E title requires mutual intent to own property T by E as opposed
to other joint ownership. In the past, courts had difficulty
determining how a husband and wife intended to own joint property
because the title documents were unclear. For some time the
common law was that all real property owned jointly by married
persons was presumed to owned T by E. Ownership of personal
property was uncertain, and married debtors had to prove an
intent to own joint property in the protected form of tenants
by entireties .
Most of the uncertainty over T by E ownership of personal property
concerned marital financial accounts. In 2001, the Florida Supreme
Court in the Beal Bankruptcy Case made it much easier for married
debtors to protect checking accounts and other financial assets
from judgment creditors. The Florida Supreme Court ruled in
2001 that all checking accounts, financial accounts, and other
personal property owned jointly by husband and wife are also
presumed to be owned tenants by entireties even if the property
is titled in the name of “husband and wife” or “husband
or wife as joint tenants with rights of survivorship.”
This presumption can be rebutted in some instances where, for
example, the “tenants by entireties” option was
available on a financial account application and the account
owners chose instead the joint with rights or survivorship.
The creditor protection depends on facts applicable to a client’s
particular financial accounts. To be safe, married persons should
ask their bank to title a new account specifically in their
joint names as tenants by entireties. The phrase “tenants
by entireties” should appear on the monthly bank statements
and signature cards although it usually does not appear on the
face of checks.
Statutory Asset Protection in Florida
The greatest number of asset protection tools for Florida residents
are contained within the Florida Statutes. Florida’s statutory
exemptions make it possible for clients to invest in financial
products which afford asset protection as well as financial
planning and tax planning benefits. The most important statutory
asset protections are as follows.
A. Salary or Wages
Wages, earnings or compensation of the head of household which
are due for personal labor or services, including wages deposited
into a bank account, provided they are traceable and identified
as such, are exempt from garnishment under Section 222.11 of
the Florida Statutes. Wage protection will be discussed further
below.
B. Life Insurance Policies and Annuity Contracts
Cash value in insurance and annuities are protected from creditors’
claims by Florida Statutes.
While a Florida resident is alive, the cash value of any insurance
policy he owns on his own life is exempt from his creditors’
claims. The protection afforded to the cash surrender value
of a life insurance policy is only for the benefit of the owner/insured
of said policy. Cash value of policies insuring a third person
are not protected.
Perhaps the most popular financial product for asset protection
planning is annuities. Florida courts have liberally construed
this statutory exemption to include the broadest range of annuity
contracts and arrangements. Private annuities between family
members should be entitled to the exemption.
The annuities statute protects both the annuity instrument and
the proceeds of annuities. Therefore, money received from an
annuity and deposited in a financial account remains protected
if the money can be traced to the annuity payment.
C. Pension and Profit Sharing Plans, IRAs
To prepare for retirement and to defer income taxation, more
and more individuals, whether they be economically middle class
or affluent, direct significant wealth into IRA accounts and
other qualified retirement plans. In Florida, retirement money
not only avoids current income taxation, but is protected from
creditors as well. Florida Statute 222.21(2)(a) provides that
any money or other assets payable to participant or beneficiary
in a qualified retirement or profit sharing plan is exempt from
all claims from creditors of the beneficiary or participant.
The statute protects all tax plans that are tax qualified under
specific IRS code sections set forth in the statute.
D. Pre-Paid Tuition and 529 Plan
Popular plans for educational savings are specifically protected
by Florida statutes. There is some uncertainty whether the college
savings plan has to be a Florida based plan.
Salary and Earnings for Head of Household
Florida Statute 222.11 provides an important unlimited protection
of earnings of a debtor who is “head of a household”
in Florida. There is no dollar limit on the amount of protected
earnings. Protected earnings is not limited to the amount required
to support the debtor’s dependents. A debtor qualifies
as head of household as long as he supplies more than 50 percent
of the support for his spouse, a child, or any other dependent
to whom he owes a support obligation. The dependent may be your
spouse or child, but the person may also be a parent or anyone
who depends on the debtor for financial support. In most cases
the dependent will reside with the debtor, but the dependent
can also reside elsewhere such as a child away at college or
a elderly parent in a residential care facility.
Additionally, the statute protects salary deposited in a bank
account, even a bank account owned in the debtor’s name,
for a period of six (6) months after the salary is paid. It
is important that wages accumulated in a protected bank account
not be commingled with other personal funds. Many people open
a separate bank account titled as a “wage account”
to clearly announce to creditors the exemption of money in the
account. The statute does not require a “wage account”
to protect deposited earnings as long as the earnings are traceable.
Some court cases that have challenged the general salary exemption
in the case of a business owned 100 percent by an individual
that pays the individual owner a salary. Generally, in the cases
the business owners made “salary” distributions
of various amounts on an irregular schedule. Sometimes the owner
paid himself money under the guise of salary either as the business
received money or as money was needed for personal expenses.
These court cases have discussed requirements for single owners
of a business to pay an exempt salary from the business. The
owner should pay himself the same amount of salary over an extended
period of time at regular intervals, and there should be a written
employment agreement between the owner and the business entity.
There should also be an employment agreement to establish the
nature of salary.
Family Limited Partnerships and Limited Liability Companies.
There are two legal tools which have substantial benefits for
estate planning or business planning as well as asset protection.
These tools are the limited partnership (LP) and the limited
liability company (LLC). The protections afforded limited partnerships
and LLCs are statutory, but they are different from other asset
protection statutes discussed above. Above described protected
assets, including homestead, annuities, life insurance, and
head of household wages are declared “exempt”property
by virtue of Florida statutes or the Constitution. Investment
interests in an LP or LLC are not “exempt” from
levy by creditors of the limited partner. There is no constitutional
or statutory provision in Florida which protects from levy a
limited partner’s interest or an LLC’s member’s
investment. Asset protection of Limited partnership and LLCs
is by virtue of the limited procedural remedy given to creditors
by Florida statutes to levy upon a debtor limited partner’s
interest or an LLC membership interest.
Partnership Asset Protection
A limited partnership is a partnership consisting of two classes
of partners, general partners and limited partners. A general
partner has general liability for all partnership debts, and
he has the responsibility and authority to manage partnership
business. The general partner controls the partnership’s
investments, distributions, and other business decisions. A
limited partner has an investment interest in the partnership,
and he plays a passive role in partnership business. An individual
can be both a general partner and a limited partner in a limited
partnership. A family limited partnership (“FLP”)is
a limited partnership formed by members of the same family.
In a family partnership, one or both spouses usually serves
as the general partner, and the spouses, together with their
children, are typically limited partners. At formation, the
parents typically own almost all of the limited partnership
investment interests, but they typically gift interests to their
heirs over time. In addition to its asset protection benefits,
an FLP offers estate planning benefits because the IRS discounts
the taxable value of limited partnership interest for gift and
estate taxation.
Most states, including Florida, have adopted what is known as
a “Uniform Limited Partnership Act”. The Act, as
codified in Chapter 620 of the Florida Statutes, dictates the
procedure through which a creditor of a limited partner can
levy upon the debtor’s interest in a limited partnership.
The Act maintains a clear distinction between a limited partner’s
investment in the partnership and the partnership’s ownership
of partnership property. A creditor of a partner has no right
to seize property within the partnership to satisfy the debt
of any one limited partner. This reflects the policy that it
is more important to protect other partners’ interests
in a partnership than it is to permit the creditor of just one
partner to satisfy a judgment in a manner that might disrupt
the partnership’s business.
The Limited Partnership Act gives creditors a limited tool to
seek recovery of a money judgment from an individual limited
partner. Section 620.1703, Florida Statutes states that a partner’s
creditor may apply for a charging lien against a limited partnership
interest.
Upon application will issue a charging order against the partnership
granting a lien to the creditor on any distributions earmarked
to the debtor limited partner. If the general partner awards
no distributions to limited partners, then the creditor gets
nothing. Moreover, in a properly drafted partnership agreement,
a creditor has no rights to inspect the books and records of
the partnership so that he is unaware of partnership income
or partnership business. In a family partnership, the general
partner is unlikely to order distributions where a limited partner’s
creditor is lurking. Where a charging lien exists, the general
partner likely will hold income inside the partnership.
Under partnership taxation principals any income earned by a
limited partnership is taxable to the limited partners on a
flow through theory regardless of whether the income is actually
distributed to limited partners. If a limited partnership has
taxable income and the general partner decides to retain the
income within the partnership, the limited partners are still
liable for the income tax. A Revenue Ruling (Rev. Rul. 77-137)
suggests that where a creditor has a charging lien on a limited
partnership interest, and the general partner does not distribute
partnership income, the creditor, not the debtor limited partner,
is responsible to pay the tax on the allocated income. In this
manner, a charging lien can become a “poison pill”
whereby the creditor of the limited partner receives no money
from distributions, but incurs tax liability in his effort to
collect a judgment debt. Therefore, given the limited nature
of the charging lien remedy and the exposure to partnership
taxation, most creditors are reluctant to pursue a judgment
against a debtor’s interest in a limited partnership.
The Florida Legislature recently amended Florida’s limited
partnership statutes including provision with reinforce the
asset protection benefits of the limited partnership. The amended
act makes clear that the charging lien is the exclusive creditor
remedy to attack a debtor’s interest in a limited partnership.
The law now specifically prohibits courts from inventing other
ways for creditors to go after the debtor’s partnership
interest. Note that general partnerships have less asset protection
than do limited partnership under Florida law, and general partnerships
should not be used as an asset protection tool.
In past years, there was concern for individual liability of
the general partner of limited partners. The general partner
is most often considered personally liable for all debts and
liabilities of a limited partnership. To eliminate personal
liability of the general partner many limited partnerships used
corporate general partners instead of individuals serving as
general partner. Florida law now offers general partners a way
to shield themselves from individual liability. A general partner
can elect to be a limited liability limited partnership in which
event the general partner is protected from personal liability
for partnership acts or omissions.
Limited Liability Company Protection
A limited liability company (LLC) is a business entity created
pursuant to Chapter 608 of the Florida Statutes. An LLC is controlled
by a manager. The manager directs the LLC’s business affairs
and determines the amount and timing of cash distributions.
The investment interest in an LLC is held by “members.”
Members invest the initial capital in the limited liability
company, and they incur taxable gains or losses from the LLC’s
business. An individual can be both a manager and a member of
an LLC. One person can form a single member LLC under Florida
law.
A limited partnership and a limited liability company offer
similar asset protection . A creditor has no right to seize
property within a LLC to satisfy the debt of a partner or member..
A creditor’s rights are limited by Florida Statute §
608.433 to obtaining what is called a “charging lien”
against the LLC membership interest which entitles the judgment
creditor to the member’s share of distributions, if any.
The charging lien remedy for LLCs makes this entity comparable
to the limited partnership as an asset protection tool.
Family partnerships are better known than LLCs as an asset protection
tool and have been employed for asset protection for a longer
time. LLCs became viable planning tools in the late 1990s when
the legislature removed taxation at the LLC entity level. LLCs
have advantages over FLPs in many situations. LLCs are generally
easier and less expensive to form and operate. Also, LLCs are
used more frequently to operating small businesses in place
of subchapter S corporations, as both entities offer flow-through
taxation. Also, Florida statutes permit a single individual
to form what is known as a single-member LLC whereas one person
cannot by himself create a limited partnership. Full comparison
of LLPs and LLCs as business and taxation tools are beyond the
scope of this Chapter. The choice of entity should be made on
a case-by-case basis after consultation with legal and tax professionals.
Offshore LLCs
Establishing an LLC in an offshore jurisdiction promises another
layer of asset protection. The Island of Nevis W.I., in particular,
has favorable LLC laws designed to attach foreign investment.
Most important, Nevis, like Florida, permits a single-member
limited liability company, and Nevis law also establishes a
charging lien as a creditor’s remedy to go after 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 income
tax consequences. Income and losses flow through to the individual
owner’s U.S. income tax return. In theory, to get a charging
lien against a debtor’s 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 U.S.
judgment giving rise to a creditor’s request for a charging
order. In addition, Nevis has a two year statute of limitation
on fraudulent conveyance suits seeking to reverse transfers
of assets to a Nevis LLC.
The Nevis Act does not require the LLC 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.
However, if the debtor/member is facing a creditor problem the
Nevis LLC is most effective if LLC management is turned over
irrevocably to an individual or a management company which is,
respectively, not a U.S. citizen or resident and which does
not have business offices in the U.S. The theoretical advantages
of offshore LLCs have not been tested in Florida appellate courts.
Offshore Trusts
Offshore trust planning is a highly-publicized method of asset
protection. 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 U.S. creditors.
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 even the trust
protectors or trust advisors, who 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 incarcerated them until they comply
with the court’s order. An offshore trust will be effective
only if the debtor/settlor is willing to relinquish irrevocably
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 U.S. courts.
Neither offshore asset protection trusts nor Nevis LLCs are
designed to hide assets from creditors nor to reduce income
tax liability.
Planning for Medical Corporations
Most physicians operate medical practices through Subchapter
S corporations. Stock in a corporation can be levied upon by
the physician’s judgment creditor. There is no “charging
lien protection” for stock in a professional corporation.
Many businesses can achieve the protection of equity afforded
by a limited liability company by converting existing corporations
to a LLC or by creating an LLC and merging the corporation into
the LLC. The medical field has a unique problem with such conversions
or mergers into LLCs because of medical insurance contracts.
Insurance contracts are written under the medical providers’
federal tax numbers. Changing an existing medical corporation
to an LLC would require a new federal tax number. The medical
business would be required to redo its insurance contracts under
the LLC’s new tax number; this is burdensome for most
medical businesses.
One solution is to leave the existing medical business intact
and have the individual physician owners convey their stock
in the S Corp to their own single member limited liability company.
The limited liability would be a professional liability company,
or “LC,” under Chapter 621, Florida Statutes. The
physician as potential debtor would no longer own stock in a
business subject to levy, but instead would own membership interests
in a LC subject only to a charging lien.
Most medical groups are subchapter S corporations. Stock in
a sub- S corporation can only be owned by individuals and not
by other corporations or partnerships. Most LLCs are taxed as
partnerships. Conveyance of stock in a medical corporation to
an LLC taxed as a partnership would forfeit the sub-S status
of the corporation and all corporate stockholders would lose
sub-S tax benefits. A different result occurs where the physician
sets up a single member LLC to own stock in a professional corporation.
A single-member LLC (or any other single-member LLC) can own
subchapter-S stock because the IRS disregards the single-member
LLC for tax purposes, and the LLC is treated as its single-member
owner. Therefore, transfer of stock in a professional S-corporation
to a single member PLC should have no adverse income tax consequences.
Accounts Receivable
Accounts receivable are often a medical business’s largest
liquid asset and also an attractive target of creditors of either
the business or their individual owners. A creditor can garnish
accounts receivable before they are paid or the creditor can
wait until after collection and garnish the proceeds deposited
in the debtor’s bank account.
Some financial advisors urge physicians to protect accounts
receivables by “factoring” the receivables which
means, essentially, pledging the receivables for loans from
institutional investors at a discount. The lender’s secured
position in the receivables has priority over subsequent judgment
liens against the same receivables.
The debtor who pledges receivables for a loan must protect the
loan proceeds received. Distribution of the loan proceeds to
the owner of the receivables puts the loan proceeds in the individual
hands where they may be vulnerable to his creditors. If the
business is the debtor and the business entity that factors
receivables, the distribution of the loan proceeds out of the
business account to the individual owners may be challenged
as a fraudulent conveyance. Many financial professionals encourage
debtors to use the loan proceeds to buy life insurance purchased
by the business on the owner’s life. Owners often feel
the financial professional is using receivable financing primarily
to push unneeded life insurance products. Another issue with
pledging accounts receivable for financing is income tax liability.
Improper structures using accounts receivable as collateral
for loans can result in immediate tax liability for the receivables.
An alternative to traditional receivables factoring involves
a secured institutional loan to the individual business owner
and the purchase of annuities. Instead of the business being
the borrower, the individual owner gets a loan directly from
an institutional lender. The owner arranges for the business
to provide the accounts receivable as security. The owner then
arranges for the purchase of an annuity. The annuity may be
pledged as additional loan collateral. Initial loan proceeds
are paid not to the owner or the business, but are wired directly
to the issuer of the annuity. This arrangement may provide a
better defense against fraudulent conveyance allegations because
neither the business nor the owner has possession of loan proceeds.
Annuities are a better asset protection tool than life insurance
because Florida statutes protect not only the annuities themselves
but also annuity proceeds after they are paid out to the owner/beneficiary
so long as they are traceable. Using offshore products such
as Swiss annuities can provide still another layer of protection.
Fraudulent Conveyance
The principle issue in any asset protection plan is the issue
of “fraudulent conveyance” which includes both fraudulent
transfers and fraudulent conversions. Florida Statutes give
a creditor the opportunity to seek reversal or nullification
of a transfer from the debtor’s name to another person
or entity if the transfer was intended to avoid paying creditors.
Similarly, there are fraudulent conversion statutes that permit
creditors to undo the purchase of exempt assets from the proceeds
of non-exempt assets.
Fraudulent conveyance is often improperly confused with the
intentional tort of common law fraud. Common law fraud permits
recovery of money damages for fraud and deceit. The fraudulent
conveyance statutes are creditor remedies distinct from common
law torts. The fraudulent conveyance statutes do not permit
awards of additional damages, and specifically provide certain
equitable remedies to the creditor. Florida courts have held
that fraudulent conveyance is not a common law tort.
There is generally, and with some exceptions, a four-year statute
of limitation on a creditors’ fraudulent conveyance actions,
which means that a creditor can allege that any transfer made
within four years prior to a judgment should be undone because
it was a fraudulent conveyance to avoid paying a debt. The fact
that a creditor brings a fraudulent conveyance action, of course,
does not automatically mean a court could accede to its request
to undo a prior transfer. There are a variety of defenses against
fraudulent conveyance allegations such as transfers for tax
benefits or estate planning as well as transfers made for adequate
consideration. Older transfers are easier to explain and defend
than more recent transfers.
An important exception from fraudulent conveyance is the using
non-exempt cash, or the liquidation of non-exempt assets, to
purchase a homestead property or to pay a mortgage on an existing
homestead. Use of non-exempt funds to purchase a homestead property
cannot be reversed or attacked even if the debtor acknowledges
that his primary purpose in buying a homestead property was
to shelter the money from future or existing creditors. For
this reason, selling non-exempt assets and using the proceeds
to improve, purchase, or pay off a homestead is an effective
asset protection technique up to, and even after, a judgment
has been entered against the debtor. The Florida Supreme Court
made an exception to allowed fraudulent conveyances into homestead
where the money judgment was because of common law fraud or
other “egregious circumstances”, a term not yet
fully defined by Florida’s courts.
Third Party Liability For Fraudulent Conveyance
Many attorneys, accountants, and financial institutions are
concerned about their liability to a creditor for assisting
a debtor in what turns out to be a fraudulent conveyance. The
Florida Supreme Court has held that there is no third party
liability under the fraudulent conveyance statutes. These statutes
empower creditors to reverse fraudulent conveyances, but they
do not provide for awards of damages against the debtor, his
agents, or his advisors.
Florida Residency
Only Debtors who are domiciled in Florida are entitled to asset
exemptions and other protections against creditors provided
by Florida law. To be a Florida resident you must establish
that your domicile, or permanent place of residence, is in Florida.
Many people own properties or houses in Florida, but are not
domiciled in Florida because their primary house is in another
state. There is no definite test of Florida domicile. Florida
domicile is a “state of mind” established by facts
and circumstances which indicate that the residence in Florida
is your home. Although you can file a Statement of Intent to
be a Florida resident, that statement is just one of many factors.
Other prominent factors used to establish Florida residence
are maintaining a Florida driver’s license, registering
to vote in Florida and designating Florida as your primary residence
on your federal income tax returns. Sending your children to
school in Florida schools is also an important indication of
Florida residence. On the other hand, people who work primarily
in other states and whose spouses or children reside in other
states have a difficult time showing that Florida is their home
Many people from all over the country who have current or potential
legal problems are interested in moving to Florida to take advantage
of Florida’s homestead protection and other asset protection
laws. There is no waiting period to be domicile in Florida.
Domicile in Florida is immediate once you establish that you
intend to permanently reside in this State. Protection of Florida
homestead is effective immediately. As soon as a Debtor moves
his belongings into the homestead so that it becomes his primary
residence the homestead is immediately protected from creditors
as long as other facts and circumstances show intent to make
the new homestead a permanent home
It is never too late to move to Florida. There are no civil
or criminal penalties for moving to Florida when one is being
sued somewhere else or when one has a civil judgment against
them in another state. There are no statutes prohibiting “fraudulent
moves” from one state to another. A possible complication
exist if another state’s court has issued an injunction
against the transfer of a debtor’s assets.
Conclusion
Asset protection is a specialized area of the law involving
primarily estate planning, creditor rights, bankruptcy, and
both income and estate taxation. Asset protection for medical
professionals often incorporates health law issues as well.
Attorneys alone cannot provide complete asset protection advice
as financial tools usually are part of an asset protection plan.
Nevertheless, asset protection is an important issue for health
care plan professionals who find themselves in an unfavorable
insurance and legal environment.
