Asset Protection Basics
Stuart A. Rader
Asset Protection Basics for Florida Residents
by Stuart A. Rader
Asset protection is an important component of estate planning. This article contains a discussion of basic asset protection tools available to Florida residents.
1. Florida Statutory Exemptions. Florida offers its residents a wide selection of asset protection planning tools. Here is a summary of the Florida asset protection safe harbors.
a. Homestead. A Florida homestead (principal residence) is exempt from the claims of creditors (except for consensual liens, such as a home mortgage or construction liens). The homestead includes up to one-half acre within a municipality and up to 160 contiguous acres outside a municipality. (The homestead protection is diminished if one pursues a bankruptcy remedy and has not been a Florida resident for several years prior to seeking the relief).
b. Insurance and Annuities. The cash surrender value of life insurance and its death benefit payable to persons other than the insured's estate are exempt from attachment, levy and garnishment. Similarly, the cash value and payments from annuities are exempt.
c. Pensions. ERISA qualified retirement plans, such as defined benefit and profit sharing plans, are exempt.
d. IRAs. Individual Retirement Accounts, Prepaid College Trust Funds, and Medical Savings Accounts are exempt from creditor claims.
e. Wages. Wages for a head of family who provides more than one-half of the support for a child or other dependent.
2. Florida Case Law
a. Tenants by the Entirety. Property that is and has always been titled jointly in the name of husband and wife is exempt from the claim of creditor to only one of the spouses.
b. Limited Partnership and Limited Liability Interests. A creditor to a limited partner or member of a limited liability member is entitled to a charging lien on the partner's limited partnership interest and member's membership interest, respectively. The creditor's rights are restricted because the lien attaches to any distributions of cash or other property, if any, to the debtor-partner, if any. If no distributions are made by the general partners or managing member after the charging lien attaches, the creditor has no right to compel distributions or liquidation of the partnership or membership interest. Further, after imposing the charging lien, the creditor is responsible for the limited partner's or member's income tax burdens including the tax on phantom income, income earned at the partnership level that is not distributed to partners, but is deemed to have been distributed pro-rata to partners.
c. Spendthrift Trusts. A spendthrift trust generally is a trust that provides that a beneficiary's interest in the trust is not subject to the claims of creditors. Florida law upholds and supports spendthrift trusts when the trust is created for the benefit of people other than the grantor. These third party trusts are commonly formed by one spouse for the benefit of his or her spouse or children and by parents or grandparents for the benefit of children and grandchildren. Florida law deems void as against public policy any spendthrift trust created for the benefit of the settlor or grantor. These self settled spendthrift trusts are void in most states. Recently Alaska, Delaware, and a handful of other states have passed statutes authorizing self settled spendthrift trusts. To date, there is no substantial case law that has tested these statutes.
3. Fraudulent Transfers. Generally, none of the exemptions are available if there has been a fraudulent transfer. In short, a fraudulent transfer is a transfer designed to hinder or delay a known creditor from collecting a debt. There is a presumption in the Florida Fraudulent Conveyance Act that the transfer is fraudulent if there is a pending or threatened action at the time of the transfer. Certain transactions that have legitimate estate planning objectives are outside the presumption, such as funding a qualified plan or IRA as has routinely been done for years past.
4. Domestic Spendthrift Trust. As noted above, both Delaware and Alaska have statutes that specifically authorize self settled irrevocable spendthrift trusts. Both Delaware and Alaska require a Trustee (other than the settlor) residing in that state and that the grantor be a discretionary and not a mandatory beneficiary. The Trustee has discretion to distribute income and principal to the settlor. These statutes have not been tested and validated by the courts. The likely attacks that a judgment creditor would employ against the domestic self settled irrevocable trust are: (1) the full, faith and credit and supremacy clauses in the U.S. Constitution; (2) conflicts of law and choice of law issues; and (3) fraudulent conveyance statutes. Notwithstanding the foregoing, many high net worth people have established these types of trust. It is recommended to use these untested trusts only for clients who:
a. Have no or minimal creditor problems;
b. Have sufficient assets for living expenses other than the asset proposed to fund the spendthrift trust; and
c. Do not need frequent access to the assets sought to be protected.
5. Offshore Trusts. When a U.S. person creates an offshore trust, he is submitting his assets to the control of a bank or individual in a foreign country and subjecting the assets to the law of that country. Common venues with favorable creditor protection laws allowing self created spendthrift trusts and weak fraudulent conveyance statutes include Isle of Mann, Channel Islands, British Virgin Islands, Cayman Islands, and the Bahamas. There is no current income tax advantage to establishing an offshore trust because all income earned by a U.S. person from a foreign trust is reportable by the individual. The primary disadvantage of the offshore trust is the unknown: what if the foreign country's laws change and become more creditor friendly; what are your remedies, if any under the local venue, if the bank or individual misappropriates the funds for its own use; and the risk of being held in contempt of court by a U.S. court for failing to repatriate the trust assets to satisfy a U.S. creditor.
6. Gifting. Gifting property to children and grandchildren, or trusts for their benefit has the impact of reducing the amount of your assets that may be subject to creditor claims. Currently, married couples can gift property worth $24,000 per year per donee without any gift tax ramifications. Further, there is a lifetime gift tax exemption of $1 million. Although this topic is usually reserved for estate and gift tax planning, it also has asset protection features.
7. Lifetime Marital Trusts. A spouse can create by gift a trust for the sole benefit of a spouse for the remainder of his or her lifetime. To qualify for the unlimited marital deduction for gifts, the trust must require that all income be distributed annually to the spouse. These Marital Trusts usually have legitimate estate planning objectives, but also provide asset protection for both the donor and donee spouses. The donor spouse receives protection by reducing the assets otherwise available to creditors. The donee spouse receives the benefit of the trust assets and the principal of the trust is protected from the donee's creditors so long as there is a trustee other than the donee spouse serving.
This article is not intended as legal advice. Before implementing any asset protection strategy, you must obtain competent legal counsel.