The Florida Asset Protection Blog

Size Of Municipal Homestead Lot Partly Under Water

Jonathan Alper — 2009-07-06T22:21:26-04:00

Your house in a municipality is homestead provided the lot is no larger than ½ acre. If the city homestead lot is greater than ½ acre the protection is applied pro rata. For example, for a lot 1 acre in size within a city only 50% of the equity is protected as homestead. This week I spoke with a man who lived on a lake front lot in the city. The lot was barely over ½ acre. The lot survey showed that the side lot lines extended several feet into the lake so that a significant part of the lot was under the lake. The dry land was less than ½ acre in size. The man asked me if the part of the lot under the lake counted toward the calculation of his homestead exemption.

I have never seen this issue, and I’m not aware of any judicial decision dealing with the issue. My sense is that the land under the lake which is part of the lot’s legal description counts in the homestead calculation so that a portion of his equity is not homestead protected. I am not aware of any legal authority that a debtor can deduct from the acreage calculation parts of his residential lot that is not usable for some reason. If a portion of a city lot could not be used for building because it was wetlands, for example, I do not think the debtor could deduct the wetlands from the lot size to fall within the ½ acre limit.

This man could ask a surveyor to segregate the dry land and the wet part of the lot on a new survey. He could then create an entity (LLC, partnership etc) and deed the land under the lake to the separate entity. This conveyance may increase real estate taxation, and it could bring objections from a homeowners association. Local laws which prohibited subdivision of the lot may not become a practical problem since he would not build on the conveyed lake property. Even though there could be legal issues, the conveyance would be of record, and it would prevent, or at least make more difficult, the forced sale of the homestead by a judgment creditor.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Finding An Offshore Bank For Your Asset Protection Plan

Jonathan Alper — 2009-07-06T18:20:37-04:00

Foreign bank accounts are an integral part of offshore asset protection. Clients who establish limited liability companies or corporations in foreign jurisdictions for asset protection frequent ask where and how their entities can set up a foreign bank account. This past week I visited an executive manager of a well-established offshore trust company that assists asset protection for U.S. citizens. The company serves as manager of foreign LLCs or as trustee of foreign trusts. The manager told me that the offshore banking environment has changed significantly in the past year or two as the IRS has cracked down on banks that have maintained secret bank accounts for U.S. taxpayers.

Because of the IRS tax scrutiny, U.S. clients seeking offshore asset protection are finding it more difficult to open bank accounts. This offshore trust company I met with has always recommended that their clients’ asset protection entities use Swiss banks, not the banks in Caribbean or central America where their offshore asset protection entities have been formed. In the past year or two the better known and largest Swiss banks have made it very difficult for U.S. citizens to maintain bank accounts in their own name or through their offshore asset protection companies. These Swiss banks have become wary of accepting any clients who might bring IRS scrutiny. There are, however, still banking opportunities in Swiss banks for asset protection entities. The person I met with has had success referring his clients to smaller Swiss banks that specialize in private banking relationships. For example, he mentioned that he has had good results with private banks such as Bank Sarasin & Cie, AG and Lombard Odier bank. He mentioned other banks as well that solicit U.S. clients.

I have not had any experience with and cannot recommend any Swiss banks. Each person interested in offshore asset protection must do reasonable due diligence of any bank involved in his asset protection plan. Remember always that offshore banking for asset protection has no income tax advantages, and instead, may require additional tax reporting to the IRS.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Tax Reporting Requirements For Offshore Asset Protection

Jonathan Alper — 2009-06-28T20:35:25-04:00

Many callers and clients express interest in offshore asset protection planning. I have prepared some offshore trusts and many offshore limited liability companies over time. Any type of offshore asset protection is complicated, in part, because of IRS reporting requirements applicable to foreign entities. I suspect there are many people with offshore asset protection entities who don't understand or comply with tax reporting rules. For example, a single member domestic limited liability company is by default a disregarded entity for tax purposes. This means the LLC on the entity level reports nothing to the IRS and is not required to get a separate tax number. The member treats the domestic LLC as a sole proprietorship for tax purposes. A single member foreign LLC established by a U.S. resident must file an election form 8832 to claim disregarded entity status. If it does not file this form timely the LLC may be treated as a C corporation and subject to corporate taxation. In addition, the offshore LLC once electing disregarded status must file information form 8858. Offshore entities taxed as partnership or corporation have different filing requirements.

Most people who create offshore entities cause the entity to maintain a bank account outside the U.S. These people are required to notify the IRS about offshore financial accounts withover $10,000 (aggregated) by filing an IRS form TDF90-22.1. U.S. taxpayers must disclose all offshore financial accounts for which they have signatory authority, or for which they have control over a third party who has signatory authority, by filing the TDF90-22.1. For example, if you appoint someone to be a manager of your foreign LLC, and the manager maintains a financial account offshore, you must file this tax form. The TDF90-22 form is due on or before June 30^th, and there are no extensions. You can control an offshore account, but you must disclose it to the IRS. Offshore accounts also must be disclosed on your 1040 income tax return. Willful non-compliance is criminal.

If you are engaged in offshore asset protection you must consult with a CPA experienced in international tax or a tax attorney. The tax reporting requirements are one of the reasons I usually try to accomplish asset protection with domestic tools under Florida exemptions before recommending more sophisticated offshore entities.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Liability For Dog Bites

Jonathan Alper — 2009-06-25T21:13:37-04:00

"Every dog is entitled to one bite." This saying refers to a legal tradition that a dog owner cannot foresee his dog is dangerous before the dog has actually bitten someone. The first dog bite puts the dog’s owner on notice to protect the public from his dog. Prior to the dog’s first bite, the tradition is that the dog’s owner cannot be held liable to foresee his dog’s poor behavior. Many people discount legal risk from their dog because they see their own dog as peaceful and well-behaved. People do not contemplate that their well-behaved dog could ever get them in legal problem prior to that "first bite." In Florida, the law is different. There are Florida statutes on dog liability that holds owners liable prior to the dog’s first bite.

Florida Statute 767.04 states that the owner of any dog that bites any person while the person is in a public place, or lawfully in a private space, is liable for damages of dog bits regardless of the former viciousness of the dog or the owners’ knowledge of such viciousness. If your dog bites, you pay. What makes matters worse is that many standard homeowner insurance policies and umbrella liability policies do not cover dog bites. Citizens Liability Insurance, the state insurance company, does not protect homeowners from liability on account of their pets. Check your liability policy.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Using Exculpatory Clauses To Limit Liability For Negligence

Jonathan Alper — 2009-06-25T18:13:19-04:00

Some businesses try to limit negligence lawsuits associated with their services or products by having customers sign agreements with "exculpatory clauses." An exculpatory clause denies or limits the customer’s right to sue the business for the business’ own negligence. These clauses may influence some potential litigants to drop potential legal actions, but business owners should not rely fully on exculpatory clauses. Florida courts have viewed exculpatory clauses with suspicion and as being contrary to public policy. Courts have stated that they will consider exculpatory provisions only to the extent that their appeared to be a clear intention of both parties to relieve one party from liability and where the exculpatory language was clear and unequivocal. Also, exculpatory clauses can never insulate a business from willful, malicious or grossly negligent conduct which injures another person.

Homestead Protection Not Afforded To House Titled In A Family Partnership

Jonathan Alper — 2009-06-23T19:06:39-04:00

Only individuals can claim homestead protection. The Florida Constitution states that homestead protection applies to "natural persons." I read a case this week wherein a debtor had transferred their homestead property to a family limited partnership for estate planning and estate tax purposes. The debtor owned 95% of the limited partnership interests, and there was a partnership agreement permitted the same debtor to reside in the house. The debtor claimed that the property should qualify as exempt homestead because he had the right to occupy the house under the terms of the partnership agreement. The debtor claimed that he had indirect equitable title to the property, and that his interest was sufficient to warrant homestead protection from his creditors.

The court denied homestead protection. The court recognized that several courts previously protected homestead properties owned in a occupant’s living trust. However, the debtor sets ups a living trust, is the lifetime beneficiary, and has the right to revoke the trust thereby returning property in personal title. In the case of this partnership, the debtor/partner was not the only person creating the partnership (there were other partners), and the debtor did not have the legal right to unilaterally revoke the partnership. The court pointed out that the "natural person" referred to in the Constitution is the legal owner and not the person with rights of occupancy. Other than using a living trust, Florida residents that title their residence in entities such as partnerships, limited liability companies, or irrevocable trusts will not have homestead protection from their creditors.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Court Protects Homestead Property Used For Debtor's Commercial Business

Jonathan Alper — 2009-06-22T23:21:05-04:00

Homestead protection applies to homes and land occupied by a debtor as his primary residence. Property used for commercial purposes or for the production of income generally does not qualify for homestead protection. A Florida bankruptcy court recently considered married joint debtors who used part of a homestead property for his residence and part of the same property for business and income production. The issue was whether the partial business use disqualified all or part of the debtors’ homestead protection from their judgment creditors. The two debtors owned a five acre parcel of land in the county. They built their residence on a minority portion of the land. The debtors had two more buildings on the same land. One building was a warehouse used exclusively for the debtors’ business. The third building was a second residence rented to an unrelated third party. In other words, two of the three structures occupying most of the property were used commercially.

The bankruptcy court held that the entire land and all three structures were protected from the debtors’ creditors in his bankruptcy proceeding and were not subject to administration as part of the bankruptcy estate pursuant to the homestead exemption.. The court found that the Constitutional homestead clause does not disqualify a homestead because the owner uses the property commercially or for the production of rental income. The court said that, the "Debtors’ commercial use of the Building (rental) and the Warehouse does not preculd them from claiming the entirety of the Real Property as exempt." The court recognized that other bankruptcy courts reached opposite conclusions in earlier cases. The case is: In re: Earnest, Case No. 08-4408-3F7.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Lenders May Delay Condo Foreclosure To Avoid Paying Dues

Jonathan Alper — 2009-06-19T11:29:05-04:00

Clients often ask me why it takes some banks so long to begin foreclosure on default loans. Part of the problem is backlog at the mortgage companies or their attorneys. Some banks are deliberately delaying foreclosures for reasons discussed this week in a Wall Street Journal article Condo Boards Take On Lenders . The article states points out that mortgage lenders are liable for unpaid condo dues when they take over the property after the foreclosure sale. In Florida, lenders are liable for as much as six months of late condo dues once they take title after foreclosure. Some condo associations are themselves foreclosing on bank owned condo units. The mortgage bank is being forced to pay accrued condo fees in order to hang on to the foreclosed property. The Journal article states that some mortgage lenders are delaying foreclosure to avoid HOA liability

Homeowner May Be Personally Liable For Code Violation Fines On Abandoned Residence

Jonathan Alper — 2009-06-10T21:42:36-04:00

When homeowners decide to let their upside down properties go into foreclosure they typically stop caring for the properties physical condition. Repairs are deferred unless absolutely necessary. After a homeowner abandons his house, as is often the case in pending foreclosures, maintenance stops. Grass and weeds grow wild, electric service stops and air conditioning is turned off. Lack of grounds and building maintenance often results in violations of local building codes. Code violations can result in fines, and violations under Florida building codes often have daily penalties. A foreclosure and subsequent bank sale resolves many assessments against the foreclosed property including real estate taxes and association dues. Code enforcement fines are not necessarily solved by foreclosure.

Under Florida law, homeowners are personally liable for code enforcement fines. A homeowner who vacates his home prior to foreclosure may be exposing himself to personal liability to local government fines that follow the homeowner after the foreclosure sale. People do not want to spend money maintaining a home they are trying to give back to the bank. However, your home is your responsibility as long as legal title in your name. Allowing your home to become an eyesore will invite neighbor’s complaints, code enforcement actions, and expensive fines.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Creditor Rights To Attack Debtor's Charitable Gifts

Jonathan Alper — 2009-06-09T12:16:27-04:00

You would think that people who donate substantial sums of money to charity would get a break when defending their charitable planning from judgment creditors. This past week a client asked me whether her creditors could attack a charitable trust she established. The debtor created the trust several years before she had any creditor problems, and the debtor was solvent at the time. The charitable trust was known as a "charitable remainder unitrust" under IRS regulations. The client donated marketable securities to the trust. When the debtor dies the trust will distribute all its property to a charity. During the debtor’s lifetime the trust pays the debtor an annual payment equal to 7 percent of trust value. The trust document contains a "spendthrift provision" which states that the trust’s payments to the client may not be assigned to her creditors. The client wanted to know if her judgment creditors can seize her annual payments or reverse the entire gift as a fraudulent transfer.

Florida law prohibits creditors from attaching payments to a debtor from a trust where the trust agreement has a spendthrift clause. However, there is an exception when the trust was established by the debtor- a so-called "self-settled trust." Courts have held that a spendthrift clause does not protect a debtor’s right to payment from a trust established by the debtor even when the trust is primarily for the benefit of a charity. A second issue is whether a creditor can reverse a charitable trust as a fraudulent transfer to avoid or delay creditors. If a debtor makes a charitable bequest of non-exempt assets to keep the assets away from his creditors the bequest could be subject to fraudulent transfer claims. A creditor could argue the debtor intended to benefit from an income tax deduction from the charitable gift rather the lose the money to the judgment creditor with no tax deduction ( assuming the debtor could not deduct the loss to the creditor). The new bankruptcy law enacted in 2005 specifically prohibited fraudulent transfer claims against charitable gifts. The bankruptcy provision is not applicable in state court fraudulent transfer claims.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Short Sale With BOA Is Bad Deal For Borrower

Jonathan Alper — 2009-06-04T21:29:42-04:00

A couple consulted with me concerning a proposed short sale of an "upside down" investment property. They had give a purchase money first mortgage to Bank of America, and subsequently, borrowed additional money under a line of credit second mortgage from the same bank. A buyer had submitted a contract for about 90% of the first mortgage balance. BOA approved the short sale. They gave the borrowers a document to sign which said that BOA would release their two mortgage liens, but it did not state that the debt would be released. The bank told the borrowers that they had to speak with representatives of another department to discuss their personal liability after the short sale. The couple asked if they could speak with someone from the department about liability prior to signing the bank’s documents which would contractually obligate the borrowers to complete the short sale. They were told that they first must agree to the BOA short sale terms before the bank would discuss their personal liability.

The story is another example of why short sales are often not in the borrower’s best interest. The banks refusal to even discuss with the borrowers their personal liability after the short sale should be unacceptable to mortgage borrowers. I have stated before my opinion that short sales benefit banks and real estate agents more than they benefit borrowers. If you sign a short sale document presented by a mortgage lender in which you consent to personal liability after the short sale you have forfeited most of your defenses to a collection suit brought by your lender. I’ve heard from many clients that their real estate salesman and their bank representatives orally assured them that short sale documents with banks are a formality and that the bank will not sue after they get the proceeds of a short sale. These assurances are not legally binding and will not protect you in court. Most people should not agree to short sales unless the lender gives you a full release in exchange for finding a buyer for the distressed property.

Estate Planning Trusts Can Jeopardize Homestead Protection

Jonathan Alper — 2009-05-27T21:52:58-04:00

Asset protection planning is part of estate planning. Tax planning is part of estate planning. Often, however what is good tax planning is not good for asset protection. A recent example is a client who is attempting to reduce their taxable estate by using a estate tax tool called a qualified personal residence trust ("QPRT"). The QPRT is a well-known estate tax reduction technique whereby the taxpayer transfers a residence to a trust and retains use of the residence. After a period of time specified by the trust title to the property passes to the heirs who rent the property back to the former owner and trustmaker. The technique freezes reduces the value of the residence for estate tax purposes. The asset planning issue is that conveyance of a primary residence to a QPRT probably strips the house of homestead protection in Florida. The Florida Constitution protects homestead owned by a natural person. Courts have protected homesteads owned by living trusts where the debtor is the trustmaker, trustee, and beneficiary. A QPRT involves third party beneficiaries and often third party trustees. I do not think a QPRT can own a homestead in Florida.

Nor can the trustmaker remove a residence from a QPRT and back into his individual name for asset protection purposes. QPRTs must be irrevocable to have their intended tax effect. A trustmaker cannot legally withdraw property from an irrevocable trust. Some QPRT trust agreements will have asset protection provisions, such as prohibiting any creditors from asserting an interest in the trust property. Without asset protection provisions in the document a trustmaker’s creditors could attempt to levy on the interest the trustmaker retains in the property. Also, if the trustmaker tries to contribute money to the QPRT to pay the mortgage a creditor could attack the payment as a fraudulent transfer. If the same residence were owned in the trustmaker’s individual name as his homestead the debtor/trustmaker’s reduction of mortgage principal could not be undone under Florida’s fraudulent transfer laws.

If and when you consult with an estate planning attorney make sure the attorney understands your asset protection concerns. Whether estate tax reduction or asset protection planning is of primary importance depends on the individual situation. Be aware that using asset protection tools may not be optimal estate tax planning, and that estate tax tools sometimes reduce asset protection.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

First Mortgage Lender Sues For Deficiency Judgment

Jonathan Alper — 2009-05-27T18:57:10-04:00

As a general rule, mortgage lenders have not been pursuing deficiency judgments during the real estate recession. Second mortgage lenders have sued borrowers individually in cases. Until this week I have not spoken with any client who had been sued for a deficiency claim by a first mortgage lender after or as part of a foreclosure. I have spoke to many attorneys who defend mortgage foreclosures none of whom have reported seeing a deficiency claim by a first mortgage lender in any of the cases they are handling. This week, I saw my first deficiency judgment by a first mortgage lender. Whether this is an isolated incident by one bank in one real estate development, or an indication of changing bank policy and greater risk for mortgage borrowers is unclear.

The particular client retained me to file Chapter 7 bankruptcy because of large amounts of unsecured credit card debt. The mortgage deficiency was just one of his credit problems and was not the main problem behind the bankruptcy. The client had borrowed money to buy an investment lot in a Ginn community from Branch Banking and Trust ("BBT") secured by a first mortgage. There was no second mortgage. The lot was unimproved. BBT filed a Motion for Deficiency including a purported property value supported by a copy of an appraisal attached as an appendix to the complaint. The debtor did not respond to the Motion so BBT did not have to prove property value at an evidentiary hearing; the court entered a judgment based on the values alleged in the Motion.

Many of my clients over the past two or three years have been fearful of mortgage deficiency judgments because they had non-exempt assets with equity. These people believed that their relative wealth made them a target for a deficiency judgment. The BBT judgment does not support the theory that mortgage lenders will pick deficiency targets based on whom they believe own collectable assets. This particular debtor is insolvent; he has no non-exempt assets which makes bankruptcy the preferred solution to all his debt problems. This debtor was not targeted based on his net worth.

This case is significant because it shows that at least some lenders involved in some investment projects may pursue investors for individual liability. Whether mortgage lenders will begin pursuing mortgage deficiencies for loans made for primary residences, as opposed to investments, remains to be seen.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Protecting Consideration Received From Partner For Sale of Common Stock In Small Business

Jonathan Alper — 2009-05-14T17:44:16-04:00

A man told me he is liable on several business loans and lines of credit. He is afraid that the bank may either call the loans or demand substantial principal reductions which he cannot afford to pay in today’s economy. He personally guaranteed all the business loans. The man owns 50% of the common stock in a profitable corporation. The corporation pays him a small salary and profit distributions. If a bank sues on any of his bank loans and gets a judgment against him the bank could then levy on the stock in his corporation. The non-debtor partner would be in business with the debtor's creditors. The man suggested selling his stock to his partner in consideration for a small cash down payment and a promissory note in order to get the stock out of his name. He intends to invest the cash in his homestead. His plan will not work as intended because the judgment creditor could garnish the note payable by the partner and demand payments from the partner.

A better solution would be to sell his stock to his business partner with different terms. First, he and partner should have the stock appraised by a business valuation expert. He can sell his stock to an "insider" provided he document the sale was made at reasonably equivalent value (not the same as fair market value). One option would be for the partner to form a new LLC and fund the LLC with the partner’s own money. The partner’s LLC would then contract with the debtor to buy his stock. Instead of paying with a promissory note the purchaser might give the debtor cash and membership interests in the new LLC, or some form of option to buy the LLC interests. LLC shares are better protected than common stock shares. Or, the LLC could provide consideration by hiring the debtor after the sale with a consulting or employment agreement for continued work on the company’s behalf. Salary paid by the LLC to the debtor would be exempt from the seller’s creditors if he is head of household (in this case, he supports his wife). The partner has a legitimate interest in purchasing the stock at below fair market value and structure the sale so that the non-debtor partner is not entangled in the debtor’s litigation. The debtor’s use of all cash received to reduce his homestead mortgage should be protected.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

Retirment Money Exempt Three Years After Its Withdrawal From Plan

Jonathan Alper — 2009-05-07T20:05:59-04:00

Several courts have sustained a debtor’s exemption of retirement fund proceeds deposited in a financial account even though the applicable exemption statute does not state that retirement proceeds are exempt after money is withdrawn from the debtor’s retirement plan. The annuity exemption statute specifically exempts annuities. Courts have read into the retirement fund exemption an protection of proceeds paid. One would expect that at some point in time money withdrawn from retirement and deposited for other use would eventually lose protection. Eventually, the exempt character of retirement distributions deposited or invested should transform to the debtor’s non-exempt assets. A recent bankruptcy case considered a debtor who withdrew retirement money in 2004, deposited the money in a financial account, and then in 2007 wrote a check from the same financial account payable to his attorney’s trust account for legal work to be performed on the debtor’s behalf. The bankruptcy trustee claimed that the money held on the debtor’s behalf in the trust account could not be exempt under the Florida Statute protecting retirement money.

The bankruptcy court held that the money in the attorney’s trust account was exempt under the retirement exemption statute. Even after four years, the debtor’s ability to trace the trust account money to withdrawals from a retirement account preserved his exemption. The court said that, "the circuitous, but traceable journal the Retirement Assets have taken over the past three years does not destroy their exempt status." The case is , In re Davis, 2009 WL 1080019, Case No 8:08-4348. This decision included an interesting discussion of homestead exemption which I will report in a subsequent blog post.