How to Protect Your Assets from Lawsuits
Florida asset protection is a legal process where a debtor structures his or her assets—such as property, cash, businesses, and investments in such a way that makes it much more difficult for a current or future creditor to collect on those assets. Asset protection planning is the process of developing a customized plan with an attorney to protect your assets from lawsuits and collection from civil judgment creditors. The steps in asset protection planning include:
- A review of your legal situation and circumstances of civil liability.
- Review of assets and income to determine what is currently protected or not protected.
- For the unprotected items, developing and evaluating legal options to better protect those assets from collection.
Asset protection planning should result in knowing what is at risk and what to do about it.
Who Needs Asset Protection?
Everyone who has been fortunate enough to accumulate assets in today’s economy needs some form of asset protection.
In the United States, there are more than one million lawyers, each with a license to file lawsuits against deep-pocket defendants. Too often, decisions by judges or juries are based more on emotion than on facts or the law and the result is a catastrophic damage award that wipes out a lifetime of hard work and investment.
If a judgment is entered against you in Florida, the judgment creditor can find out your financial information and begin to collect on the judgment. Asset protection uses legal methods to better protect what you have and your income from collection on the judgment.
Asset Protection Through Risk Management
Asset protection starts with common sense planning. People can reduce legal risk and lawsuits by planning and minimizing unnecessary risks in their personal and business dealings. For example, people should not rely on oral promises and oral agreements in your business dealings as they often result in confusion and misrepresentation. Avoid getting involved in business and financial relationships with people you do not trust or with people who seem combative and adversarial in nature.
Business agreements should be reviewed by a lawyer in advance. A few dollars spent on attorney fees prior to signing the agreement can save substantial attorney fees in the future.
Legal Basis of Florida Asset Protection
Florida law is considered to be debtor-friendly because of the numerous assets exempt from lawsuits and civil judgments under Florida law. The strength of Florida’s debtor-friendly laws stems from three legal sources:
- The Florida Constitution.
- Florida statutes, or laws, made by the state legislature.
- Florida common law.
The Florida Constitution is the fundamental and most consequential Florida legal document, and it sets forth Florida’s most important protections, including Florida’s well-known homestead protection.
Next, the Florida legislature has enacted many statutes which protect various types of assets from creditors of Florida residents. There are also statutes providing creditors with tools to collect judgments.
Florida Common Law
Finally, there are protections based on what is referred to as the common law or legal tradition. Common law is law established by appellate judges in individual cases. Courts define Florida asset protection through their interpretation of Florida’s Constitution and statutes. Consistent interpretations become part of common law legal tradition. Because judges respect legal precedent, the common law is applied in courts even though the principals are in our Constitution or in Florida statutes.
Assets That Are Protected in Florida
The generous protections provided by the Florida constitution, Florida statutes, and Florida common law make Florida one of the most debtor-friendly states in the country. Florida’s asset protection laws apply to permanent residents of Florida and people in other states who own property in Florida. People anticipating substantial civil judgments often move from other states to Florida to become a Florida resident for asset protection purposes.
Florida Statutes exempt many types of assets from creditor execution. Florida common law protects property owned jointly by a husband and wife from the creditors of either spouse, using a type of ownership called tenants by entireties. Limited partnerships and limited liability companies are used for asset protection of businesses or investment assets.
The key assets that are protected from creditors in Florida include:
- Homestead, with some acreage limitations.
- The wages of someone who qualifies as head of household.
- Life Insurance.
- Retirement Accounts. For example: an IRA or 401k.
- Tenants by entireties property when the judgment is separate.
- Interest in a multi-member LLC with a properly written LLC operating agreement (but still subject to a charging lien).
- Disability income.
- $1,000 of value in a vehicle.
- $1,000 of personal property (or $4,000 if you do not own a home).
- Prepaid collect plans.
- Various generic exemptions, such as health aids, medical savings accounts, and unemployment benefits.
- Social security.
- Some properly-drafted estate planning trusts protect the beneficiaries’ interest and inheritance from their creditors
Can You Lose Your House in a Lawsuit in Florida?
In most cases, you cannot lose your house in a lawsuit in Florida. The most important and well-known exemption from creditors is the homestead exemption of real property. Your home is protected from creditors in Florida subject to acreage limitations.
There is no monetary limit on the homestead exemption.
If the home is in the city, the homestead exemption applies up to 1/2 acre. If the home is in the county, then the exemption applies up to 160 acres of contiguous property.
There are some exceptions to the homestead exemption for fraud and similar misconduct.
Business Asset Protection
Protecting assets belonging to a business requires a different set of asset protection tools than protecting individual assets. Business asset protection involves structuring business assets and income to make it more difficult for a creditor with a monetary judgment against the business to collect any assets.
Protecting Property from the IRS
Asset protection planning usually does not shield tax debtors from U.S. income tax liability. Some people believe they can move assets offshore to protect the assets from IRS collection or from the assets being subject to U.S. income tax.
For example, do not confuse offshore asset protection planning with offshore tax planning. Offshore asset protection with after-tax money is legal. Moving assets offshore to avoid the recognition of income amounts to tax evasion. Offshore tax evasion is criminal.
Asset Protection After a Lawsuit is Filed
Asset protection works best when implemented before any legal problems are on the horizon. Reorganization of asset titles and asset transfers done before creditor problems arise are effective if liability does eventually arise. Think of asset protection as a form of legal insurance; like commercial insurance asset protection works best when put in place before problems arise.
Unfortunately, just as most people do not visit a doctor until they experience illness or pain, most people do not consider asset protection until they feel vulnerable to creditor lawsuits in the foreseeable future.
Asset protection strategy in the context of threatened litigation, or even after a lawsuit is filed, is difficult but not impossible. It is not too late to engage in some asset protection before a judgment creditor actually obtains an interest in your property by lien or execution.
Asset protection tools put in place during times of legal threat may not cure legal problems and may not work as well as advanced protection planning, but even late-implemented asset protection tools put the debtor in a better position that he would be otherwise.
Common Problem in Florida Asset Protection Planning
The main problem with late-stage asset protection is the potential that asset titling or transfers can be undone as fraudulent conveyances or fraudulent conversions (which a court could reverse after a civil judgment is entered).
Transfers done in the face of a legal threat may withstand fraudulent conveyance attack when properly planning minimizes badges of fraud. In most cases, for example, Florida law permits the transfer of non-exempt assets to a homestead property even after a judgment is entered by a court.
Asset Protection Mistakes
The most prevalent asset protection mistakes include:
- Not Understanding the Purpose of Asset Protection. Asset protection will not make a debtor “judgment proof”; however, asset protection may improve the debtor’s settlement negotiating position by making it harder for the judgment creditors levy on assets.
- Believing That It Is Too Late To Protect Assets. Its never too late to improve protection. Late asset protection can still help if the debtor does not hide assets and lie to judgment creditors under oath.
- Thinking Creditors are Stupid or Lazy. A debtor should never underestimate the creditor’s skill and intelligence. Creditors and their attorneys are not stupid. People should not invent asset protection schemes that they believe are beyond creditor’s discovery and comprehension.
- Hiding Assets. There are no longer any secrets in this world. People cannot hide assets, offshore or anywhere else, to protect them from creditors, the IRS, or former spouses.
- Fraudulent Transfers to Family. Debtors cannot protect assets by giving them to family members. Such transfers will make other family members defendants in fraudulent conveyance lawsuits.
- Falling for Asset Protection Promoters and Scams. As asset protection planning has gained popularity, there are many companies promoting complicated asset protection. These promoters are usually not attorneys. Their plans are overpriced and usually will not work well in a courtroom. Beware of non-lawyers selling asset protection plans.
- Confusing Estate Planning with Asset Protection. Asset protection is part of estate planning, but a living trust or self-settled irrevocable trust does nothing to protect assets from creditors.
- Confusing Bankruptcy Law and Asset Protection Law. Bankruptcy law does not affect Florida’s unlimited homestead exemption and other exemptions outside bankruptcy court. Debtors have less protection in bankruptcy court than they do in state court, and filing bankruptcy should be a last resort.
- Giving Up Control Over Your Assets. The easiest asset protection plan is to give someone else control over your wealth. This is not a good solution in most cases.
- Paying Large Fees For Complicated Asset Protection Plans. The best asset protection is the simplest asset protection. Many promoters and some attorneys try to convince clients that effectiveness is a function of how much money is invested in overly-complicated asset protection devices and multiple layers of entities. Good asset protection is not necessarily the most expensive and complicated plan.
Page last updated on March 2, 2021