What is Asset Protection?
Asset protection is a legal process where a debtor structures their assets, such as property, cash, businesses, and investments, to make it much more difficult for a current or future judgment creditor to collect on those assets.
Asset protection helps at any stage of debt. It is almost never too late to protect assets from creditors. Certain asset protection strategies are viable even after a lawsuit is filed and even after a judgment is entered. Still, the most effective asset protection opportunities are available before potential liability arises.
Asset protection planning typically starts with a consultation with an attorney who will:
- Review a the legal situation and circumstances of civil liability.
- Develop a comprehensive list of assets and income to determine what is currently protected or not protected.
- For the unprotected items, evaluate legal options to better protect those assets from creditors.
Florida Asset Protection
Florida is considered one of the best states for asset protection because of its generous creditor exemption laws. Florida law provides an unlimited protection of the homestead and provides protection for tenants by entireties assets, head of household wages, retirement accounts, annuities, life insurance, disability insurance, and more.
Furthermore, Florida has opted out of federal bankruptcy exemptions, so Florida residents filing bankruptcy can use the broader Florida exemptions in their bankruptcy cases.
Asset protection planning in Florida involves developing a customized plan with an attorney specialized in Florida exemption law to protect assets from lawsuits and collection from civil judgment creditors.
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.
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 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, common law is applied in courts even though the principals are in the Florida 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:
- A 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 college 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.
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 business and personal dealings. For example, people should not rely on oral promises and oral agreements in their 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.
Tenants by the Entireties
One of the simplest asset protection techniques for Florida debtors is to own property as tenants by the entireties. Tenants by entireties refers to joint property owned by a married couple that is owned as an indivisible fictional unit. It cannot be severed without the consent of both spouses in most circumstances.
Assets held as tenants by entireties are generally immune from collection from a civil creditor of just one spouse.
Mere joint ownership is not enough for property to qualify as tenants by entireties. The ownership must meet the “six unities,” which include unity of possession, unity of interest, unity of time, unity of title, survivorship, and unity of marriage.
So long as there is not an existing creditor issue, couples should consider re-transferring any assets held jointly or individually prior to marriage to themselves as tenants by entireties.
For LLC interests, special provisions in an LLC operating agreement can ensure that the interest are held as tenants by entireties.
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 inside the city limits, 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.
Florida statutory exemptions are not effective against certain “super creditors” under U.S. federal law. These super creditors includes the IRS, Department of Justice, SEC, FDIC186, and FTC. Super creditors can seize assets that may be exempt under state law. For example, the IRS and SEC can take half of personal property that otherwise might be exempt as tenants by entireties.
Federal agencies can also seize assets prior to a judgment even being entered against the Florida debtor. In this way, the federal agency substantially affects the ability of the debtor to defend themselves, which often forces a favorable settlement for the U.S. government.
IRS Tax Liability
Asset protection planning usually does not shield tax debtors from U.S. income tax liability.
While 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, 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 for Divorce
The concept of asset protection typically refers to protection from civil creditors. It is not generally effective when avoiding alimony, child support, or property settlements.
Family law judges in divorce cases have additional powers that a judge in a civil case would not. These judges can override state law protections for retirement accounts, asset protection trusts, state bank account protections, and even homestead.
A court can hold a debtor in contempt for failure to turn over assets in a marital settlement or failure to pay child support. This threat of contempt (and jail time) makes asset protection planning in a divorce context typically ineffective.
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.
Think of asset protection as a form of legal insurance. Just 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 they would be otherwise.
Common Problems 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 with proper planning. 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.
Unique Asset Protection Strategies
Some unique asset protection strategies may be effective against particularly aggressive creditors or unusual client situations. These strategies are difficult to implement without an attorney. Some of these asset protection techniques include:
- Conversion of a regular IRA to a Roth IRA and then payment of income tax with non-exempt cash
- For businesses, placing vehicles, including trucks and equipment, in separate companies and using independent contractor agreements for the drivers.
- Using LLCs to insulate owners from liability.
- Leasing rental property to a “leasing company” that then contracts separately with tenants in order to insulate the property owner from liability.
- For a business owner, have the business or practice guarantee debt that is owed by a related party.
- Have a business entity enter into a long-term lease with a property-owning entity, with the property entity getting a lien on corporate assets.
- Using a limited partnership or LLC to provide a barrier from liability stemming from properties owned.
- Converting assets already exempt from creditors into other longer-term exempt assets.
- Using an asset protection operating agreement to provide charging order protection or tenants by entireties protection for LLC assets.
- Purchase of an additional homestead when existing homestead is already exempt for other reasons.
Domestic Asset Protection Trusts
Some states have enacted specific laws allowing the formation of domestic asset protection trusts (DAPT), which are self-settled trusts that are nonetheless protected from judgment creditors. In contract, in Florida self-settled trust are not protected from creditors.
The most commonly known domestic asset protection trust states are Wyoming, Nevada, Delaware and Alaska. Many websites have been created over the years touting the benefits of asset protection trusts in these states for U.S. residents.
However, Florida debtors should be cautious before rushing to set up asset protection trusts in these states. It is uncertain as to which state’s law would apply in a Florida court should a creditor seek to collect on the assets in the trust. Some courts have held that no matter what state the trust is formed in, it is Florida law—not the law of the trust formation state—that applies.
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 to levy on assets.
- Believing that it Is too late to protect assets. It’s 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 a 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.
Common Questions about Florida Asset Protection
Which assets are protected under Florida law?
Most assets protected from collection under Florida law are included in Chapter 222 of the Florida Statutes, including the homestead exemption, head of family wage exemption, and exemption for retirement accounts, among others.
Additional exemptions are located in other sections of Florida law, as well as in what is called Florida common law.
Does Florida have asset protection trusts?
Florida does not have a domestic asset protection trust statute. While there are certain ways to use trusts to protect assets from future creditors, it is difficult and there are often better asset protection tools.
Are joint bank accounts protected in Florida?
Joint bank accounts opened by a married couple are in some circumstances protected from judgment creditors as tenants by entireties. If the tenants by entireties rules for bank accounts are not followed, however, then it is possible that the joint account will not be protected.
Can your house be seized in Florida?
The Florida constitution exempts a judgment debtor’s homestead from forced sale and levy with very few exceptions. There is no dollar limit on the exemption, but there is an acreage limit. The exemption applies to 1/2 acre if the property is located in a city, or 160 acres if it is located in an unincorporated county.
How long can a collection agency come after you in Florida?
A judgment in Florida is valid for 20 years. The clock starts when the judgment is issued, not when the debt arose or when the case was filed.
Last updated on August 28, 2021