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Below are some common questions relating to Florida asset protection law and the asset protection process. If you have any more detailed questions, please do not hesitate to contact us to see how we can assist you.
What is asset protection?
The term asset protection typically describes the body of laws and legal techniques which may be utilized to secure an individual or business from civil liability to creditors. Generally speaking the term creditor denotes any party or potential party to whom a monetary obligation is owed or could be owed. For example, a creditor can be a note holder, plaintiff in a lawsuit, governmental body, bankruptcy trustee, or business entity. The only requirement for the purposes of asset protection planning is that a liability or potential liability for payment exists.
A sound asset protection strategy looks to shield the largest possible value in assets from the largest possible potential class of creditors. Contrary to certain beliefs, this is not done by hiding assets from discovery or secretly transferring assets to third parties. In fact, this type of activity can easily be undone as a fraudulent conveyance (discussed below). Rather, the goal is to utilize established legal maneuvering, along with appropriate timing and justification, to place significant barriers between the creditor and the assets of client.
What is the difference between inside liability and outside liability?
An inside liability is a liability which arises as a result of a cause of action generated by an entity (e.g. trust, partnership, LLC). For example, a lawsuit which arises as a result of a slip and fall on a piece of property owned by a business would be considered an inside liability. Inside liabilities may affect other assets owned by the entity which are not directly related to the cause of action. For example, due to the slip and fall the plaintiff is now going after all of the cash in the business accounts.
An outside liability is a liability to the ownership of an asset which is not directly related to a cause of action arising from that asset, again, usually in conjunction with an entity structure. For example, if John Doe is responsible for a car accident one day while driving to the golf course, the injured plaintiff may seek to seize Mr. Doe’s ownership interest in his business as a means of satisfying the resulting judgment. No action taken or not taken by the business threatens Mr. Doe’s ownership interest, but rather an outside attack by a personal creditor.
What is the corporate liability shield?
Under Florida law, the owners of certain business entities such as corporations, limited liability companies (LLC), limited partnerships (LP) or limited liability limited partnerships (LLLP) may receive personal liability protection from the debts of the entity itself. This means that a creditor who has a valid claim against the entity may not look to the owner’s personal assets to satisfy the obligation; rather they are limited to the assets owned by the entity itself. The corporate liability shield is a powerful asset protection vehicle, but the benefits are by no means absolute. For example, individual owners who sign personal guarantees will usually find it impossible to later avail themselves of the corporate liability shield as a defense against payment. Likewise, careful planning must be undertaken in order to avoid giving the courts an excuse to pierce the corporate veil (discussed below).
What is piercing the corporate veil?
Piercing the corporate veil is a term which describes the circumstances whereby an entity owner loses the privilege of their inside limited liability protection. Courts can and will ignore the corporate liability shield if they determine that the circumstances call for such treatment. Piercing often occurs when the evidence shows that the business did not follow proper corporate formalities or that the owners commingled business funds with personal funds (i.e. alter ego doctrine); and where the owners failed to adequately capitalize the business or established the business for fraudulent or illegal purposes (i.e. equity principles).
A relatively recent legal development known as reverse piercing of the corporate veil is also cause for concern. Simply put, reverse piercing is the opposite of the more familiar and established standard piercing doctrine. Whereas in a standard piercing action a creditor is seeking to hold an individual owner responsible for the entity’s debts, in a reverse piercing action a creditor is attempting to hold an entity responsible for an individual owner’s debts.
What are some common methods of Florida asset protection?
A spendthrift trust is established when an individual (known as a Grantor or Settlor) creates a trust in compliance with the Florida Statutes and places their personal assets into the trust either during their lifetime (inter vivos) or at death (testamentary) with the requirement that the trust assets to be used for the benefit of another person. If done properly, these assets are then removed from the individual’s estate and, in some cases, are no longer subject to seizure or forced sale by creditors. In order to be effective, the trust must contain a properly drafted spendthrift provision. A spendthrift provision is a clause in the trust which prevents the beneficiary from granting or assigning their beneficial interest in the trust over to their creditors and which further restricts the courts granting such an interest to most creditors.
An LLC or partnership may be used to provide asset protection if the entity is properly established and the process is well-advised. Generally speaking, an individual establishes a Florida partnership or limited liability company and contributes valuable assets to that company, which then acts as an extension of the individual to conduct business transactions based on the contributed property. In regards to inside liability, the corporate liability shield should protect the owner of the entity from personal responsibility, absent fraud or other circumstances which would give a court reason to pierce the corporate veil. In regards to outside liabilities, a creditor who wishes to seek recompense from the assets of the owner which have been transferred to the entity must seek a charging order through the courts. In Florida, a charging order is the creditor’s exclusive remedy with regards to the debtor’s ownership interest in a properly established asset protection entity. The Florida Statutes do not allow the creditor to foreclose on the debtor’s interest in the business entity, nor do they allow the creditor to force distributions from the entity to satisfy the debt. Essentially, the creditor is left standing outside of the entity awaiting payment on a distribution that the company may or may not choose to make to the debtor.
Other Florida asset protection strategies may utilize Florida’s generous protection of the value of homestead real property and the various protections found in the Florida Statutes of retirement accounts, property owned by spouses as tenants by the entirety, head of household wages, the value of life insurance or annuity products, and education accounts.
What is a fraudulent transfer?
Any transfer of property made in furtherance of an asset protection strategy may be set aside if the transfer is later found to constitute a fraudulent transfer or fraudulent conveyance. A fraudulent transfer is a transfer that is made with the intent to hinder, delay, or defraud present or future creditors. Given that the intent of the transferor can be difficult if not impossible to definitively prove, courts will often look to the individual facts and circumstances of the case to infer the existence of fraud. This is commonly referred to as identifying the badges of fraud. If a fraudulent transfer is found to exist, a creditor can sue to overturn the transfer, undo any asset protection measures that were taken, and put the subject property back in the debtor’s hands where it then becomes subject to the collection process. Issues of timing, formality, accuracy, intent, and public disclosure may all be of vital importance in defending against a fraudulent transfer allegation.