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

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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 Trust

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.

Jon Alper

About Jon Alper

Jon is an attorney focusing on bankruptcy and asset protection in Orlando, Florida.