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Safeguarding Your Assets from Creditors & Lawsuits

In the estate planning world, the term “asset protection” can be considered a bit of a “bad word.” This is because Florida law provides that any transaction designed principally to “avoid, hinder, delay or defraud” creditors can be unwound, or, in other words, set aside. But the truth is that an integral part of estate planning should always include an assessment of the client’s liability exposure, whether the client is a physician, an amateur pilot, or a retired schoolteacher.

Common Asset Protection Mistakes

The client’s file should never be labeled “Asset Protection” or “Creditor Protection Planning,” because if a transaction ever is challenged and the client’s file is subpoenaed, these types of labels are a “nail in the coffin” so-to-speak, because they speak to the client’s intent with regard to potential creditors. That’s right, I said potential creditors: under Florida law, generally, it is frowned upon to avoid, hinder, delay or defraud both actual present creditors and potential creditors. Thus, it is of the utmost importance that the client and their estate planning attorney broach the topic of asset protection with proper safeguards.

Best Practices

  • First, the client and their estate planning attorney should discuss asset protection techniques in person or by phone, never by email.
  • Second, the client’s file should simply be titled, “Estate Planning.” Even if the client’s primary goal in meeting with the attorney is asset protection planning, it is a good idea for the attorney to update the client’s core estate planning documents in conjunction with any asset protection techniques. This bolsters the client’s position that their overall goal was an estate planning update generally, and any creditor protection benefits derived therefrom simply were tangential.
  • Third, asset protection planning should always be commenced when the “sky is clear,” meaning ideally, the client should put planning in place that minimizes liability exposure when there are no potential claims or lawsuits pending. The mere threat of litigation is enough to unwind even the most sophisticated asset protection maneuver.
  • Fourth, a qualified estate planning attorney will conduct an assessment of the client’s creditor exposure without even being asked; we all drive or ride as a passenger in motor vehicles on a daily basis, which by its very nature is a dangerous activity. Moreover, and unfortunately, our society is extremely litigious – so these days everyone is a potential target for a lawsuit.

What Can You Do to Protect Yourself?

My clients are often surprised that under Florida law, most of their assets already receive some level of creditor protection. The type of protection generally falls under one of three primary categories: constitutional, statutory, or common law. Here are some common examples applicable to Florida residents:*

1.) Florida Homestead

Florida’s Constitution provides that a Florida resident’s primary residence is not subject to forced sale by most creditors, including most judgment creditors. Thus, your primary residence can be one of the safest places to put your cash. This being said, one obvious drawback is the lack of liquidity of real property and the fact that every investment in your residence does not necessarily increase its market value: just because you spend $40,000.00 on an infinity pool does not mean that the value of your residence has now increased by $40,000.00. It should also be noted that there are three primary types of creditors that can lien and force the sale of your primary residence in Florida:

  1. a lender with a properly recorded mortgage;
  2. the IRS and other taxing authorities; and
  3. mechanic’s lienholders.
There are also important exceptions to homestead creditor protection where the funds used to purchase or improve the residence can be traced to illegal activity. While the status of your residence as your “homestead” for creditor protection purposes is not exactly the same as the homestead exemption you may receive for county property tax purposes, the two are to some extent related, and it is important that you apply for and receive homestead exemption status from the Pinellas County Property Appraiser or the appropriate property appraiser in your county on a timely basis as soon as possible after you purchase and move in to the residence.

2.) Qualified Retirement Plans

Most qualified retirement plans, including 401(k)s and most IRAs, receive creditor protection by virtue of §222.2221(2)(a), Florida Statutes. Importantly, the statutory protection is strongest when applied to the primary plan owner and his or her spouse; there is at least one case that seems to say that the statutory creditor protection of assets within qualified plans is not as strong when your children or other third parties inherit your qualified plan assets upon your demise (the reasoning being: it’s not their retirement; they didn’t work for it, so there is less of a public policy in protecting it from their creditors).

3.) Cash Value of Life Insurance

Florida Statutes, §222.14 protects the cash value of life insurance policies from the creditors of the policyholder, thus making a well-structured, sound life insurance policy a safe place to store excess cash that can be accessed relatively quickly, if needed, either by virtue or withdrawal or a loan from the policy. When life insurance proceeds pass to a named beneficiary, the proceeds pass outside of the decedent’s probate estate, thereby insulating the proceeds from the claims of the decedent’s creditors. Therefore, it is imperative that clients ensure their life insurance policies name at least one valid beneficiary; proceeds payable to a decedent’s probate estate lose their creditor protected status upon the death of the decedent.

4.) Annuities

Annuities with life insurance companies also are creditor protected under Florida law by virtue of Florida Statutes, §222.14. In addition to the cash value of annuities, the income stream from annuities also enjoys creditor protection by virtue of the decision of the Florida Supreme Court in In re McCollam, 12 So. 2d 572 (Fla. 1993): the court ruled that because the payment stream from the annuity was, in essence, the core of the contract, it was exempt from creditor attachment.

5.) Tenancy by the Entireties for Married Persons

Married Florida residents enjoy a special non-statutory form of creditor protection known as “tenancy by the entireties” (or “TBE” for short). Essentially, TBE is a joint tenancy with the right of survivorship plus the unity of marriage (the parties must be married at the time the property became titled in their joint names). TBE protection emanates from common law, specifically the Florida Supreme Court case of Beal Bank, SSB v. Almand & Associates, 780 So. 2d 45 (Fla. 2001). Assets titled as TBE are exempt from creditors who have claims against only one spouse. For example, a creditor with a judgment against their husband only cannot attach TBE assets of both husband and wife. Notable exceptions to TBE creditor protection include “super creditors” such as the IRS. It is also important to note the “bad day” exception: the same example as above, except wife, dies; in this scenario, the judgment creditor of the husband can pursue the assets in husband’s sole name upon the death of wife.

6.) Business Entities

Properly structured business entities, including partnerships and limited liability companies (“LLCs”), can provide significant creditor protection by insulting liabilities arising from within the business from assets outside of the business, and vice versa. It is important to note that Florida law treats single-member LLCs differently than multi-member LLCs; therefore, this type of planning should be overseen by a qualified estate planning attorney who should coordinate the income tax election for the business with the client’s accountant or CPA.

7.) Advanced Asset Protection Planning

While this article enumerates some of the most common creditor exemptions available to Florida residents, there are other more sophisticated techniques available, including, for example, family limited partnerships and irrevocable trusts established either domestically or offshore. A qualified estate planning attorney can determine whether you are a candidate for these advanced techniques based on the size of your estate, as well as your estate planning goals and risk profile generally.

*This article does not include an analysis of how creditor exemptions available under Florida law apply in bankruptcy, which generally is governed by Federal law.

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