If a creditor has filed a civil lawsuit against you—or has already gotten a judgment—you may be wondering about strategies to protect your assets from litigation and creditors. No law requires you to pay a judgment. Failing to pay a judgment creditor is not a crime, and you cannot go to jail for refusing to write a check to the judgment creditor.
Creditors have various legal tools to collect their judgment. Asset protection starts with recognizing these creditor tools, evaluating their effectiveness against your assets, and then structuring your assets and income in a way that makes collection difficult. Asset protection can be effective after a lawsuit is filed or even after a judgment is entered.
How to Protect Assets from Civil Lawsuits
Using proper asset protection strategies in advance of any creditor issue can often result in you not having to pay a future judgment. Unfortunately, most people begin protecting their assets after a legal issue has arisen. But even in these cases, proper asset protection planning can make creditor collection more difficult.
Florida provides many asset protection strategies to help you shield assets from potential judgment creditors. Asset protection planning techniques are based upon each person’s particular facts and legal situation.
There are ten primary ways to protect assets from lawsuits and judgments:
- Risk Mitigation
- Appropriate Insurance
- Florida Homestead
- Tenants by Entireties
- Limited Liability Companies
- Head of Household Exemption
- Financial Products
- Offshore Planning
- Estate Planning
- Domestic Bank Accounts
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1. Risk Mitigation
Planning to minimize risk and liability is fundamental to the protection of your wealth. Marriage provides strong asset protection tools to protect either spouse against individual creditors but not against joint creditors of both spouses. Married people should not expose themselves to joint liability. For instance, married couples should not agree with any lender to have both spouses co-sign loan documents, including notes and note guarantees. Automobiles should not be owned jointly causing both spouses to be jointly liable for car liability.
2. Appropriate Insurance
Some aspects of life unavoidably expose married people to joint debt. An example is car ownership where Florida law imposes liability on the owner and the negligent driver. Another example is premises liability for physical injuries incurred on your home property. The best asset protection strategy for potential liability from car or boat ownership is maintaining substantial liability insurance with umbrella coverage. Uninsured motorist coverage will pay the insured if they are the victim of negligence by an underinsured driver.
Professional liability insurance is important for professionals, such as doctors, accountants, and attorneys. Professional insurance policies are available for:
- Malpractice insurance (for attorneys and doctors)
- Fiduciary coverage to insure a breach of fiduciary duty.
- Personal disability income insurance
- Business non-owned and hired automobile insurance
- Leasing insurance (whether a tenant or landlord)
- Corporate director and officer coverage
- Business worker’s compensation insurance
- Business interruption insurance
These types of liability insurance cover your losses and also pay for your legal defense. Having ample insurance limits allows the insurance policies to pay the injured party’s damages and avoid a lawsuit that threatens your personal assets. A plaintiff who accepts your insurance company’s payment releases you and the insurance company from further claims and damages.
3. Florida Homestead
The best-known Florida asset protection strategy is the Florida homestead. The Florida Constitution protects a debtor’s primary residence from levy and execution to collect a debt. There are no value limits on homestead protection. However, there are exceptions to homestead protection based upon the size of the homestead or the nature of the judgment debt.
To qualify for Florida homestead protection, the debtor must establish:
- That the debtor intends the property to be their permanent and primary residence.
- That the home is situated on a lot that is less than 1/2 acre in a municipality or less than 120 acres outside a municipality.
- That the debtor owns the property either in their individual name or as a beneficiary of a revocable trust.
The Florida homestead is sometimes less effective if the debtor files for bankruptcy. Particularly, bankruptcy law states that the homestead exemption is limited to approximately $160,000 (2020) if acquired within 1215 days before the debtor’s bankruptcy filing, unless the debtor’s interest in the homestead was purchased with proceeds from a previously owned homestead. Married couples filing bankruptcy jointly can each claim a homestead exemption.
Tip: The Florida homestead is one of the most protected assets in the entire country.
4. Tenants By Entireties
Florida law considers jointly owned marital assets acquired during a marriage to be owned as “tenants by the entireties.” In theory, property owned as tenants by the entireties is owned by one person, and neither spouse can sever the property without the other spouse’s consent. Because neither spouse acting alone can voluntarily transfer or encumber entireties property, a creditor of only one spouse cannot force the non-debtor spouse to involuntarily transfer or encumber an entireties asset.
Entireties assets are exempt from the creditors of either spouse individually, but they are not exempt from joint creditors of both spouses. Ownership as tenants by entireties is an efficient asset protection tool for married couples against their individual debts. Tenants by entireties protection applies to both real and personal property.
Tenants by entireties protection may not extend to IRS debt and certain other federal debts. Entireties protection may not protect a married couple from liability for negligence in operating jointly owned vehicles and boats.
5. Limited Liability Companies
Chapter 605 of the Florida Statutes governs the creation and operation of limited liability companies. Using LLCs as a Florida asset protection vehicle is a common part of business owners’ asset protection plans, and LLCs, rather than corporations, are used to form most small businesses. LLCs are better than corporations for the individual owner’s asset protection. A judgment creditor may levy upon a judgment debtor’s stock in a corporation. When the debtor is the sole stockholder, the creditor after levying the stock can control the cash and other assets held by the business. On the other hand, the debtor’s membership interests in multi-member limited liability companies are not subject to levy or foreclosure. The creditor remedy is limited to a charging lien on the LLC’s distributions of cash or property, if any, to the debtor member.
LLCs should have an operating agreement that expresses the terms and conditions applicable to the LLC members. A properly drafted LLC operating agreement includes provisions that support asset protection. For example, the operating agreement can restrict the transfer of membership interests to creditors of any one member and other third parties and prevent a creditor from participating in LLC business or voting. An LLC operating agreement can set limitations and conditions on distributions to members with problem creditors, and it can impose on creditors an obligation to contribute money or services to the LLC.
6. Head of Household Exemption
Salary and wages are debts owed to employees. In Florida, wage garnishment is the legal remedy that a creditor uses to collect salary or wages owed to the judgment debtor. A creditor can file a Motion for a Continuing Writ of Garnishment that will garnish wages perpetually until the judgment is paid or employment ceases. Federal law limits wage garnishments to 25% of the debtor’s wages.
Florida law protects salary and wages payable to a debtor who is head of household.
A head of household is a person that provides more than 1/2 support for a dependent, though there are exceptions. A creditor may not garnish wages payable to a debtor who is head of household. There are important exceptions applicable to business owners or government creditors.
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7. Financial Products
Florida asset protection strategies can involve financial planning and financial products that are exempt under Florida law. Annuities of any variety and cash value life insurance are exempt from creditors, and these products enable a debtor to invest in marketable securities through an asset-protected conduit.
Florida law protects a debtor’s annuities and the proceeds from an annuity. A debtor should segregate exempt annuity proceeds in a separate bank account. This way, the debtor can clearly show that their proceeds came from an exempt annuity contract rather than a non-exempt source.
Another asset protection financial product is cash value life insurance. Florida law protects the cash value of a debtor’s life insurance contract insuring the debtor’s own life. An added benefit of cash value life insurance policies is that insurance death benefits are not subject to probate after the debtor’s death. However, if the beneficiary has creditors, the beneficiary must protect the life insurance death benefit proceeds from their own creditors.
8. Offshore Planning
Some debtors move financial assets offshore and beyond U.S. court jurisdiction by creating foreign limited liability companies or trusts with foreign managers and trustees.
Many attorneys and financial professionals publish books and websites to promote offshore asset protection tools. These publicly marketed offshore programs are often complicated and expensive. But just because an asset protection program is expensive does not mean it is effective, and offshore asset protection is usually not the best asset protection technique for a Florida debtor. Because of Florida’s debtor-friendly laws, most Florida residents can protect assets without resorting to offshore planning.
That said, offshore planning may be appropriate for Florida debtors in situations where Florida law exemptions are insufficient.
Tip: Using an offshore trust with an offshore LLC is an effective, although expensive, asset protection technique for wealthy individuals.
9. Estate Planning
Typical estate planning includes legal entities that protect assets from the potential creditors of the heirs or trust beneficiaries. Assets left to children outright pass title through formal judicial probate, and the creditor of any heir could levy on the heir’s share of the probate estate. A better estate planning strategy is to leave assets in a testamentary spendthrift trust for the benefit of the next generation. A beneficiary’s creditors cannot reach assets left to them in a properly drafted testamentary trust.
Some people create irrevocable trusts for their children and transfer assets to the trust during their lifetime estate planning. Trusts are used as estate planning tools to ensure sufficient money to pay for children’s education. After transfer to a trustee, the assets are protected from the trustmaker parents’ creditors because the parents no longer own the assets. However, lifetime transfers to an irrevocable trust are subject to creditor allegations that the transfers are reversible fraudulent conveyances made to avoid or hinder the parents’ creditors.
10. Domestic Bank Accounts
Most judgment creditors will attempt to garnish a debtor’s bank accounts. A writ of garnishment served on the debtor’s bank is an efficient tool to force payment of a judgment. Some debtor bank accounts contain money exempt from garnishments such as exempt wages, social security or disability payments, or annuity proceeds. A creditor may still legally garnish a bank account holding exempt funds, and it is the debtor’s burden to convince a court that all or part of the garnishment money is exempt from creditors.
Debtors should take steps in advance to avoid their bank accounts being garnished after a judgment. An effective asset protection strategy is a bank located within the United States that is not subject to writs of garnishment. There are state laws that prohibit garnishment of accounts at certain types of banks. These banks offer FDIC-insured accounts with typical online access and banking features.
About the Author
Gideon Alper specializes in asset protection planning for individuals and their families.
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