We live in a litigious society where anyone’s assets are at risk. Doctors, lawyers, accountants and other professionals face the risk of having to defend themselves against potential malpractice claims. Defamation claims are on the rise now that people are freely posting statements on the internet. Corporate officers and directors also face the risk of being held personally liable for poor decisions that cause a company to have losses. This being said, there are several asset protection strategies that you should consider. In doing so, it is important to speak to your attorney, accountant, and/or financial advisor to ensure that these strategies compliment your long-term objectives. It is also important not to use these strategies in an effort to defraud a creditor.
When it comes to asset preservation, the importance of proper kinds and amounts of insurance cannot be stressed enough. Professionals, in particular, should obtain as much insurance as they can afford. While for some professionals the cost of insurance does not make sense, the following is a non-exhaustive list of insurance that every professional should obtain:
- Malpractice insurance
- Personal and/or business liability insurance (including an umbrella)
- Fiduciary coverage if they are responsible for the funds of others
- Directors and officers coverage
- Personal automobile insurance
- Business non-owned and hired automobile insurance
- Landlord/tenant liability insurance
- Business worker’s compensation insurance
- Personal disability income insurance
- Business employment practices liability insurance.
If you are sued, liability insurance provides coverage for defense costs whether you win or lose. Often times, defense costs total more than the judgment itself. Insurance can also be used to satisfy a judgment, thereby protecting your assets.
2. Homestead Property
Florida is often referred to as a “debtor-friendly” state as it offers a number of laws that residents can use to obtain protection against creditor claims. Declaring your primary residence as your homestead is a great asset protection tool. The Florida Constitution provides in relevant part that a person’s “homestead” is not subject to a forced sale by a judgment except for the payment of taxes and assessments, obligations contracted for the purchase of the properties, or money owed for improvements or repairs performed on the property. There are six basic requirements that must be met to establish a Florida Homestead. These requirement are:
- Establishing that you intend to use the property as your permanent residence
- Meeting the acreage limitation of (a) half an acre of land (or less) if located within a municipality; or (b) 160 acres of land (or less) if located outside of a municipality
- Establishing that you own the property
- That the property be located in Florida
- Establishing proper type of residence requirements (i.e., fee simple title, fractional interests, leaseholds)
- Establishing the occupancy requirement.
If you satisfy the above requirements, you may be entitled to obtain unlimited Florida homestead exemption. The exemption is subject to the Bankruptcy Abuse Prevention and Consumer Protection Act (the “BAPCP”). The BAPCP provides that an interest in homestead that is claimable as a state exemption is limited to $125,000 if the interest was acquired within 1215 days prior to the debtor’s bankruptcy filing, unless the homestead was acquired by a family farmer, or the interest in the homestead was purchased with proceeds from a previously owned homestead.
3. Tenants by the Entirety (“TBE”)
If you are married, titling your property as TBE can be a good asset protection tool. Florida recognizes TBE as a form of property ownership for both real and personal property. When property is titled as TBE, husbands and wives are considered “one person,” and neither spouse is able to sever the property on his/her own. Because no spouse has a separate interest in the property, a creditor of only one spouse cannot attach the TBE property to satisfy its claim, unless it is the Internal Revenue Service. Also, if one of the spouses passes away, or the spouses divorce, the TBE classification is lost.
While titling property as TBE can be a good tool, cars, boats and other recreational vehicles should be titled solely in the name of the spouse that primarily uses the vehicle. This is because Florida recognizes the dangerous instrumentality doctrine. This doctrine imposes strict vicarious liability upon the owner of a vehicle who voluntarily entrusts that motor vehicle to an individual whose negligence causes an accident. Thus, if one spouse is in an accident, and the other spouse has their name on the title, the assets of both spouses can be used to satisfy a judgment.
4. Qualified Retirement Plans and IRAs
Most people have a significant amount of their assets in some form of retirement plan or individual retirement account (“IRA”). In 1974, Congress overhauled the pension laws by enacting the Employment Retirement Income and Security Act of 1974 (“ERISA”). ERISA provides creditor protection from both the employer’s and employee’s creditors. The BAPCP Act was also revised so that certain exemptions apply to retirement plans. A retirement plan will be “presumed” to meet the requirements of the BAPCP if the plan (a) has received a favorable determination from the IRS under section 7805 of the I.R.C. and (b) the determination is in effect on the date of the bankruptcy filing. While Florida has opted out of the BAPCP exemption, it did enact a Fla. Stat. 222.201 which provides certain rights for a debtor to receive benefits, which include “a payment under a stock bonus, pension, profit sharing, annuity, or similar plan or contract on account of illness, disability, death, age, or length of service, to the extent reasonably necessary for the support of the debtor and any dependent of the debtor.” This protection is subject to a 730 day Florida residency requirement. While professionals are often under the impression that only a maximum of $40,000 can be contributed each year in a retirement plan, a well-crafted, individualized plan can allow a professional or business owner to maximize their retirement plan contributions by contributing much more than $40,000 each year.
Florida law provides creditor protection to the “proceeds” of “annuity contracts.” This exemption is subject to the 730-day residency requirement provided in the Bankruptcy Code (“BC”) section 522(b)(3)(A). Payments from annuity contracts should be segregated from other assets as once these payments are commingled with other assets, they may be subject to creditor attachment.
6. Life Insurance
Life insurance is also a good tool for creditor protection as Florida law protects the cash surrender value of certain life insurance policies. Once again, this exemption is subject to the 730-day residency requirement provided in the Bankruptcy Code (“BC”) section 522(b)(3)(A).
Life insurance proceeds also are not subject to probate if a beneficiary is named. It is important to note, however, that proceeds payable to the beneficiary are not protected from that beneficiary’s creditors, unless the proceeds are placed in a trust with a spendthrift provision.
7. Irrevocable Trusts
Assets placed in an irrevocable trust are generally protected so long as the transferor is not a potential beneficiary of the trust. Under an irrevocable trust agreement, the grantor transfer assets to a trustee, directing the trustee to control the trust in accordance with the directions established in the trust document. This tool can be very useful where one spouse wants to provide for the other spouse and does not feel comfortable making an outright gift to the spouse, or the other spouse works in a high-risk profession. In this situation, the individual should consider creating a “QTIP trust.” A QTIP trust provides that all income earned on the assets of the trust are to be distributed to the spouse for his or her life, however, the individual has the ability to decide how those assets are to be distributed at his or her spouse’s death – thus ultimate control remains with the individual. The individual, of course, cannot be a beneficiary to this trust.
8. Prenuptual Agreements
Anyone who gets married hopes to have the “happily ever after” marriage. Unfortunately, for those who have been through a divorce, the financial reality of a divorce can be devastating. An ex-spouse can be one of the most unforgiving creditors. Any individual with significant assets should consider entering into a prenuptial agreement. Retaining an attorney is one of the most important things you can do to assist you through this process as there are several requirements that need to be met in order to ensure that the prenuptial agreement is enforceable.
9. 529 Plans and Other College Savings Plans
Florida Statute Section 222.22 provides that monies paid into or out of the Florida Prepaid College plan are not subject to attachment, garnishment, or legal proceedings in favor of any creditor of the purchaser of the beneficiary of a plan. The statute also provides protection to Coverdell Educational Savings Accounts, the Uniform Gift to Minors Act and the Uniform Transfers to Minors Act. These vehicles provide a great way to provide a benefit to your children or grandchildren, and also receive the benefit of creditor protection.
Gifts are protected from creditors as you no longer have possession of the property. In making a gift, you should be concerned with the federal gift tax. Also, if you are concerned about gifting property to an individual outright, the gift can be placed in a trust, which may or may not be treated as a completed gift for gift tax purposes.
Depending on your situation, these asset protection vehicles may safeguard your lifetime savings. With the help of professionals, a few simple maneuvers can make a huge difference in your financial well-being.
Seek Profesional Advice
As mentioned before, it is important to speak to your attorney, accountant, and/or financial advisor to ensure that these strategies compliment your long-term objectives. Please feel free to contact De Varona law if you should have any questions regarding asset protection strategies. De Varona Law provides a free initial consultation and serves Miami-Dade, Broward, Palm Beach and Martin Counties.