Financial planning and asset protection in Florida refers to using financial tools in addition to, or in place of, legal tools. Many financial products provide Florida residents asset protection in addition to financial planning and retirement benefits. Four such important financial tools are leveraged annuities, regular annuities, cash value life insurance, and leveraging business accounts receivable.
Annuities are protected from judgment creditors under Florida Statute, §222.14. There are financial tools that combine asset protection of annuities with sound financial planning. One such tool is annuity arbitrage. Annuity arbitrage is a financing planning tool which enables older debtors in good health to fully fund life insurance for their descendants and generate cash flow protected from creditors during their lifetime. The life insurance, the annuity, and even the annuity proceeds paid to the debtor are protected from creditors.
Immediate annuities involve a lump sum investment in an annuity contract in exchange for a guaranteed income stream. The amount of the income stream is based on prevailing interest rates, and most importantly, on the age and health of the annuitant. Annuitants with a shorter life expectancy because of age and health typically are offered larger periodic payments. Life insurance premiums are also based on the insured’s life expectancy. Different companies selling either immediate annuities or life insurance contracts sometimes use different mortality tables and make significantly different judgment on a person’s life expectancy. When the annuity issuer assumes a shorter life expectancy for the applicant than does the life insurance issuer, the applicant has a financial opportunity.
Sometimes an experienced and astute financial professional can match individuals with particular annuity companies and particular life insurance companies to create a meaningful divergence in life expectancy assumptions. When the annuity company is convinced of a relatively shorter life expectancy, the applicant’s health, although not necessarily perfect, is good enough to warrant life insurance based on a relatively longer life expectancy, the annuity income stream will often exceed life insurance premiums. In such event, the immediate annuity will provide payments in excess of life insurance premiums, and the immediate annuity will both fund the life insurance and provide the individual a cash flow sheltered from creditors. The life insurance policy is typically owned by a life insurance trust to keep the insurance outside the insured’s taxable estate and to protect the death benefit from the beneficiaries’ creditors and former spouses.
The profit potential from this investment is important in defending creditor attacks of fraudulent conveyance. If the creditor argues that a debtor purchased the annuity and insurance to shelter money from creditors, the debtor can point out that the investment was done to take advantage of an unusual arbitrage opportunity to fund life insurance for estate planning purposes and to generate cash flow for lifetime support. Only relatively sophisticated financial professionals can arrange a profitable annuity arbitrage. Individuals should only deal with financial advisers with demonstrated experience in successful annuity arbitrage as an improperly structured arbitrage arrangement may have adverse income tax consequences.
Asset protection is available by purchasing international annuities. In particular, Switzerland and Liechtenstein laws guard annuities from attack by creditors from outside countries including the United States. Swiss law, for instance, provides that Swiss annuities are not part of a debtor/owner’s bankruptcy estate even if a foreign (U.S.) court expressly directs liquidation of the annuity policy. Swiss and Liechtenstein fraudulent conveyance statutes provide that a fraudulent conveyance claim against their annuities must be brought in their country’s courts. Purchasing an annuity in the U.S. as well as offshore may more easily be defended against fraudulent transfer allegations as being a prudent financial planning tool.
Accounts Receivable Financing
Accounts receivable are often a business’s largest liquid asset and are also an attractive target of creditors of either the business or its individual owner. 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.
For many years, financial advisers have sheltered accounts receivable by “factoring.” Factoring means pledging the receivables for loans from institutional investors at a discount from the receivables’ face value. The discount provides the lender a security cushion against collection problems and considers the time required for collection and receipt. The lender takes a security position in the accounts receivable as a condition for the money loan. The lender’s secured position in the receivables has priority over subsequent judgment liens against the same receivables.
The challenge for the debtor who pledges receivables for a loan is the subsequent protection of the loan proceeds received. Distribution of the proceeds to the owner leaves the money vulnerable in the owner’s hands, and if the business is the debtor, the distribution out of the business account to the individual owner may be challenged as a fraudulent conveyance. Many financial professionals encourage debtors to use the loan proceeds to invest in life insurance purchased by the business on the owner’s life.
Another alternative entails an institutional loan to the individual business owner secured by accounts receivable 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 its accounts receivable as collateral for security. The owner then arranges for the purchase of an annuity in his individual name. The annuity may be pledged as additional loan collateral. Initial loan proceeds are paid not to the owner of the business, but are wired directly to the issuer of the annuity. This arrangement provides a better defense against fraudulent conveyance allegations because neither the business nor the owner has possession of the loan proceeds in their bank accounts. 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.
What is Equity Stripping?
Equity stripping is a relatively new term in asset protection law describing an old asset protection technique. Equity stripping refers to pledging a non-exempt asset as security for a money loan. In most cases, the debtor obtains a loan from a commercial bank and secures the loan with a mortgage or lien on the non-exempt assets he wants to protect. The bank records the security instruments which gives the bank’s security interest priority over judgments against the debtor subsequently obtained by other creditors. In order for these other creditors to attack the encumbered asset, they would first have to pay off the amount of the lender’s secured loan. Pledging a valuable non-exempt asset to secure a new loan essentially drains the equity from a non-exempt asset and permits the debtor to move the cash borrowed beyond the reach of creditors. Exempt assets, such as a Florida homestead or retirement plan, should not be pledged to borrow new money because these assets are already protected from creditors and cash obtained from a loan secured by an exempt asset may become unprotected.
Equity stripping is useful in certain situations. Business owners or professionals often have large accounts receivable or valuable equipment which cannot be assigned or titled in other names. Banks giving lines of credit almost always ask for a first secured position on a business’s receivables and equipment because these are the most liquid and valuable business assets. The bank’s security interest is established and recorded when the line of credit is established even though no money is lent to the debtor. The business can borrow money on the line of credit if and when it perceives a legal problem. Money borrowed through a line of credit is not protected from creditors, and the business must find other means to protect the borrowed funds such as distributing money borrowed to the business owners to pay principal on their homestead mortgage.
Equity stripping is used by people moving to Florida who mortgage their existing home and use the proceeds to purchase a Florida homestead. Another example is a real estate investor who owns multiple properties with equity. Changing title to multiple properties involves the expense of setting up new legal entities and substantial transfer taxation. An alternative is to buy new properties with loans cross-collateralized by presently owned properties which are otherwise unprotected.
Bitcoin and subsequent virtual currency products may become popular asset protection planning tools because of the anonymity of ownership. People can exchange dollars for Bitcoin through exchanges which can be either domestic or overseas. Technically, each exchange is required by U.S. law to register the buyer’s personal information if the buyer is in the United States. This rule is not always followed – especially in smaller and offshore exchanges.
Practically, there is no public record of Bitcoin purchases. Bitcoin wallets are similarly anonymous as Bitcoin balances and transactions are identified only by a digital code with no link to a person or place. A judgment creditor would not know where to begin searching for evidence of Bitcoin purchases or transactions. Other than the debtor’s own testimony, a creditor will have no way to search for Bitcoin assets.
Creditors have various tools to collect money judgments from debtor assets. The law provides different types of tools to attack different types of assets. For example, garnishment is the tool used to take money owed to the debtor including bank accounts and wages. Judgment lien certificates place a creditor lien on the debtor’s tangible personal property. It is unclear whether creditors have a legal tool to seize a debtor’s Bitcoin. Bitcoin is essentially a 21 digit code accessed with an encrypted password. Bitcoin does not seem to be a debt owed by a wallet or an exchange so is not subject to garnishment. Bitcoin does not seem to be tangible property subject to a lien certificate and levy by a county sheriff. The debtor’s asset is the password which, without the complete honesty of the debtor, would be almost impossible for a creditor to find or verify.
It is unclear how asset protection law will classify Bitcoin and what creditor tools would be appropriate to recover Bitcoin. The IRS has stated that Bitcoin is not an “alternative currency” but is a form of intangible personal property. Other regulatory agencies and different courts may arrive at different conclusions about the inherent nature of Bitcoin and assign Bitcoin to some other asset class. How courts settle on a legal characterization of Bitcoin will help determine the creditor tools required to recover Bitcoin in satisfaction of a judgment.
Often the primary issue in a debtor’s asset protection planning is the area of fraudulent transfers and conversions. A debtor’s transfer of Bitcoin would be difficult to reverse as a fraudulent transfer because the transferee is identified only by his digital code in the debtor’s virtual wallet. It is easy for a debtor to transfer Bitcoin to a recipient address owned by someone outside the jurisdiction of the court, including overseas. There is no way for a creditor to identify either the owner or location of a transferee’s Bitcoin address. In some cases, the debtor could honestly state that he does not know the identity of the individual who received his Bitcoin transfers.
It is unclear whether a debtor who uses money to purchase Bitcoin is engaged in a transaction that falls within the scope of fraudulent transfer or fraudulent conversion statutes. A debtor opening and funding his own Bitcoin account is essentially like opening a bank account – the owner of the money and the Bitcoin is the same so there is no transfer from the debtor to a third party. If the purchase of Bitcoin is not a transfer, it would not be reversible as a fraudulent transfer. Secondly, Bitcoin is not an exempt asset under Florida Statutes such as annuities or life insurance. Therefore, when a debtor changes money to Bitcoin, he is not technically converting a non-exempt asset for an exempt asset because the Bitcoin is not exempt.
If courts agree that a debtor exchanging money for Bitcoin in an online wallet evidenced by a digital code is neither transferring the asset to another person nor converting their asset to an exempt asset then creditors could not have available the broad remedies provided by Florida’s fraudulent transfer and conversion statutes to satisfy their judgments from Bitcoin accounts.
For asset protection planning purposes, a Bitcoin account functions similarly to offshore banking prior to the IRS’s crackdown of anonymous personal foreign accounts. In times past, and especially prior to 2001, U.S. citizens could open personal bank accounts offshore. But offshore banking laws would make it very difficult for a U.S. judgment creditor to garnish the offshore account. Foreign bank secrecy made it difficult for creditors to discover these accounts or to ascertain amounts of money deposited.
Today, it is almost impossible for U.S. citizens to establish an anonymous bank account, or any type of bank account, outside of the U.S. With the advent of Bitcoin, a U.S. citizen can open and maintain a financial account that has creditor protection features similar to an offshore bank in that the Bitcoin account is anonymous and maintained outside the geographical jurisdiction of domestic courts.
Current offshore asset protection planning sometimes involves transfers of money and other intangible property to an offshore trust (or an LLC) where assets are placed under the control of a foreign trustee, or in the case of an LLC, a foreign manager. Offshore planning purports to protect the debtor’s assets because the trustee or manager who controls the trust/LLC is not subject to U.S. court jurisdiction. The geographical location of a Bitcoin wallet is unclear, but it is likely beyond direct jurisdiction of U.S. courts. Its advantage over traditional offshore planning is that the debtor does not relinquish control over the virtual wallet to a third party trustee or manager.
Even though Bitcoin, like offshore accounts, represents assets located outside Florida, the individual debtor with these assets is subject to the personal jurisdiction of Florida courts so long as the debtor is a Florida resident or is a business with ties to Florida. There has been concern that a Florida state court might compel the Florida debtor to take actions necessary to turn over a Bitcoin account to a judgment debtor and hold the debtor in contempt of court if he does not comply. However, recent Florida court rulings have held that Florida courts do not have jurisdiction over a Florida debtor’s assets situated outside of the state.
Few people use Bitcoin accounts for asset protection planning because of the perceived insecurity of this asset and its value fluctuations. However, there are many computer entrepreneurs and venture capital companies currently working toward Bitcoin improvements. Because of Bitcoin’s applicability to worldwide commerce the rewards of developing a secure and stable virtual currency are substantial. As Bitcoin evolves, it may also become a popular asset protection tool.
What is Virtual Currency: Virtual currency, including its best-known Bitcoin, is a new and growing method of value exchange. Presently, Bitcoin is the preeminent virtual currency although entrepreneurs are trying to develop improved alternative currencies. Today, Bitcoin functions as both a currency alternative and a payment system for transferring value. Bitcoins are re-expressed as credits recorded on a publicly available online ledger. In any transaction, payments and receipts of Bitcoins change the buyer and seller balances on their respective ledgers. Bitcoin has some similarity to traditional online banking to the extent that payment is made by computer and is evidenced by increases and decreases in the parties’ credits posted to their respective online accounts. Bitcoin owners can use their ledger credits in exchange for goods and services to the extent the receiving party has a Bitcoin account and is willing to receive Bitcoin credits as payment, or alternatively, the recipient uses a Bitcoin payment processor willing to accept the Bitcoin and sends the receiving party hard currency such as dollars. The number of merchants that accept Bitcoin is small, but their number is growing.
Bitcoin differs from traditional currency in many ways, but primarily because Bitcoin’s market value is not tied to underlying hard assets and is not guaranteed by any sovereign nation. Although all currency (including U.S. dollars) can change value in the global market, Bitcoin value fluctuates substantially more than sovereign currency. Bitcoin credits change value based upon several market forces including supply and demand and changes in Bitcoin’s perceived security and liquidity.
Virtual Currency Ownership: Ownership of Bitcoin is posted to the owner’s “wallet,” which is a collection of a person’s “addresses” that hold some amount of Bitcoin. In order to buy, receive, or use Bitcoin, one must first obtain a personal wallet from an online site. Your wallet appears on your computer or mobile app. Bitcoin wallets are free, and one person can get several wallets or use one wallet for multiple transactions. A popular issuer of Bitcoin wallets is the website blockchain.info. Getting a Bitcoin wallet is simple – you create your password but you are not required to enter your name or an email address. The blockchain.info website specifically says that passwords are not recoverable because there is no online record of a person’s password. Upon registration with blockchain.info, you will obtain a 21-30 digit Bitcoin address, and you can obtain as many additional addresses as desired for free.
The Bitcoin address given to you when you obtain a wallet acts as a ledger of Bitcoin transactions and currency balances. The wallet keeps track of your ledger and your individual Bitcoin transactions. It shows the history of transfers to and from your wallet’s Bitcoin address to other addresses including the amounts of the transactions. Anyone can send Bitcoin to your address but only the owner can transfer Bitcoin from his own address.
Transfers among different Bitcoin addresses are administered by third-party Bitcoin clients that run exchange protocols. In a Bitcoin transaction, a seller of goods or provider of services will request the transfer of virtual currencies to the seller’s Bitcoin address. If the buyer agrees, he initiates the Bitcoin exchange. When received, this amount goes into the seller’s wallet, and both sides of the transaction are reflected on the parties’ wallet ledgers. The Bitcoin transfers are final and irreversible. Once you have sent Bitcoin online to a recipient there is no way to cancel or reverse the transactions such as there is in a credit card charge or ACH transfer. A Bitcoin transaction is similar to a cash transaction.
There are Bitcoin exchanges where people may exchange Bitcoin for traditional currency. To date, the market value of Bitcoin, the principal virtual currency, has fluctuated substantially in the general range of $1.00 to over $1,000.
Bitcoin Transactions: Commercial use of Bitcoin is unfeasible unless the transactions can be confirmed and transfers can be proven legitimate. The inability to confirm the transaction and prevent “double-spending” prevented the widespread use of virtual currency until the advent of Bitcoin, which uses a combination of public transaction ledgers and cryptography processes (similar to secure websites) to prevent double-spending. Bitcoin transactions are being confirmed through sophisticated computer algorithms administered by independent third parties. The confirmation analysis becomes more complicated over time as the amount of Bitcoin in circulation and number of Bitcoin transactions increases.
Third party computer systems that monitor Bitcoin are not paid as employees or contractors by any central authority because there is no central Bitcoin authority. Rather, they are rewarded for their monitoring efforts by the creation of new Bitcoin assigned to their own wallets. Earning new Bitcoin in consideration for monitoring and confirming Bitcoin transactions is known as “mining” Bitcoin. Mining encourages technically-oriented businesses to confirm Bitcoin transactions and enhances the legitimacy of Bitcoin currency. Any individual with appropriate computer services can participate in Bitcoin mining. This third-party confirmation through mining is essential to the legitimacy and value of Bitcoin.
Records of transactions between Bitcoin addresses are public. The sender and recipient’s digital Bitcoin address is recorded and listed for every exchange. There are public records of the amount of Bitcoin sent to any Bitcoin address. However, the records of the sending and receiving Bitcoin digital addresses do not identify the owner of the address. There is no online record that identifies a person associated with any particular digital Bitcoin address. Knowledge of the owner of one Bitcoin wallet only reveals transactions to and from that wallet and, as stated above, an individual can own multiple wallets and digital Bitcoin addresses.
It is unclear how Bitcoin gains and losses will be taxed. If the IRS treats Bitcoin as a capital asset, then exchanges of Bitcoin for traditional currency would result in capital gains or capital losses for tax purposes. The IRS has recently discussed taxation of Bitcoin transactions as a barter exchange under rules applicable specifically to bartering.
Non-Recourse Life Insurance
Cash value life insurance on the life of a Florida debtor is exempt from creditors under Section 222.13, Florida Statutes. Non-recourse life insurance is a creative financial tool which incorporates life insurance policies financed by third-party investors whereby the insured benefits from cost-free, risk-free life insurance with the added opportunity to profit financially during the insured’s lifetime.
A key element of most life insurance contracts is the contest period during which a life insurance company may challenge a policy application and refuse to pay death benefits in the event of the insured’s death (most policies have a two-year contest period). Two years after issuance of a policy the death benefit “vests” so that benefits may be paid upon the insured’s death regardless of mistakes or misrepresentations about the insured’s health on the insurance application.
There are private and institutional investors who will invest money for the insured’s purchase of a life insurance policy with the expectation of the policy’s appreciated value following the two-year contest period. These investors will advance initial premiums on a condition of repayment, with interest, at the end of the contest period or upon the insured’s death within the first two years.
Other investors, primarily institutions, find financial opportunity in purchasing large, vested insurance polices at the end of the contest period. A large, two-year old life insurance policy has value to third-party institutional investors especially when the insured’s life expectancy is relatively short by virtue of advanced age or poor health. These institutional investors purchase select vested life insurance policies for cash with the expectation of receiving death benefits in a relatively short time. The purchase and sale price are set at a discount of the full death benefit depending upon the insured’s age, health, and other financial considerations.
Combining an eligible insured, an investor willing to speculate on the policy purchase, and institutions in the market for vested insurance policies creates a unique opportunity for cash-free investment in a creditor protected financial vehicle known as “non-recourse life insurance.” The benefits and options in non-recourse life insurance change during the term of the policy. At the outset, an investor lends money to a life insurance trust created by the insured for initial premium payments. If the debtor/insured dies within the initial two-year contest period, the investor is repaid its investment loan, plus interest, from the death benefit, and the balance of death benefits are paid through the insurance trust to the trust beneficiaries. At the end of the contest period, the debtor has the option of selling the policy to a different institutional investor or repaying the initial premium lender and walking away from the transaction. In that case, the debtor has enjoyed free life insurance coverage for the preceding two years. The debtor/insured also has the option to repay the initial investor with his own funds and take over future premium payments.
A more profitable option for the debtor/insured at the end of the two-year contest period is to sell the policy to an institutional investor. Two years into the policy, the death benefit is vested and the debtor’s life expectancy is at least two years less than it was upon policy issuance. If the insured’s health has deteriorated during the two-year contest period, the value of the policy is even greater. In any event, the now-vested life insurance policy has enhanced value which the debtor/insured can realize through the sale of the policy to financial institutions. If the vested policy is sold, the initial lender/investor is repaid with interest at the sales closing, and the investor is responsible to pay future years’ premiums. The debtor/insured’s trust keeps all sales proceeds over and above lender repayment and accrued premium liability. Upon the insured’s death, the investor receives the death benefits.
Non-recourse life insurance provides the debtor/insured creditor protected financial gain with no cash outlay or liability as well as free life insurance during the two-year vesting period. This financial vehicle is, however, not available for all people. Only certain individuals with a certain financial net worth, age, and health profile qualify for issuance of large life insurance policies attractive to initial lenders and long-term institutional financing. Younger individuals in good health who themselves are not a candidate to profit from non-recourse insurance because of their long life expectancy often assist their parents or grandparents in earning money through this financial product.
Non-recourse life insurance is extremely complex and involves substantial legal documentation. An improperly structure program could have adverse income tax consequences. Individuals interested in pursuing creditor-protected investment in non-recourse life insurance should consult financial professionals experienced with this sophisticated financial product.
What to Do Next
We help people go through their assets and income and determine what is at risk of collection from a judgment creditor. We then develop a plan to protect any exposed assets from collection. If you’re interested in protecting your assets from monetary judgment creditors, contact us or schedule an appointment online.
Last updated on June 9, 2020