We have assisted hundreds of clients – from medical doctors to business owners to real estate developers- in protecting their assets in the event of a lawsuit. We understand that wealth accumulated over a lifetime can be lost in a lawsuit.
The first line of defense is exemption planning. We try to make use of the generous Florida exemption statute to the extent that it makes economic sense. Florida exempts cash value life insurance, annuities, individual retirement accounts, pension and profit sharing plans, wages paid to a head of household, and disability benefits without limit. Florida also exempts the homestead- the primary residence- without dollar limitation. The only limitation is on the size of the lot- ½ acre within a municipality and 160 acres outside of a municipality.
But what about other assets that are not exempt under state law? For example, stocks, bonds, certificates of deposit, and real estate other than the homestead? Here we often would put these assets in a family limited liability company or family limited partnership. Other owners could be the spouse and children (directly or in trust).
This is where we discuss the “shoe metaphor”. This means that in general, the judgment creditor “steps into the shoes” of the judgment debtor and can seize bank accounts, stocks, bonds, etc. of the judgment debtor. There are two exceptions to the shoe metaphor- an interest in a limited partnership and an interest in a limited liability company. In these cases, the judgment creditor’s rights are limited to a “charging order” so that the creditor only has right to intercept distributions from the entity, if any, that would otherwise be paid to the judgment debtor. Often, we write the entity agreements in such a way as to prevent distributions unless all partners or members consent. Without such consent, there can be no distribution, and therefore, no payment to the judgment creditor.
Another aspect of asset protection planning is organizational planning. Here we need to be concerned with “inside liability” and “outside liability”. Inside liability refers to entity liability. For example, under agency theory, the employer is liable for the acts of his employees in the course and scope of their employment. Under such theory, if the employee is liable- for example, a doctor-associate commits malpractice, the employer- the entity- is liable. The choice of entity is not important- liability is liability. But what is important is what assets the entity owns. The key is to keep the entity poor. We have techniques to do just this. Outside liability refers to the individual’s ownership interest in an entity which could be lost in lawsuit unrelated to the entity. This needs to be considered as well.
We do not do asset protection/ wealth preservation, in a vacuum. We need to be careful that we are not solving one problem- a theoretical creditor- for real problems- taxes. Thus we need to take taxes into account- including, Income Tax, Estate Tax, Gift Tax, and Employment Tax. We also need to take into account control. Many professionals, business persons, and others are understandably reluctant to give up control to others, just for asset protection. There are ways to handle this as well.
The biggest issue we face is having our clients do their planning in advance. If the planning is consummated before an event occurs- such as malpractice- this is not usually a difficult process. On the contrary, after an event occurs, the opportunities are far more limited. In such a case, the law of fraudulent conveyances and the law of fraudulent asset conversions can unwind asset protection maneuvers and cause a catastrophic loss.
Here are some of the areas we assist our asset protection clients:
- Use of Statutory Creditor Exemptions
- Choice of Entity to Minimize Taxes and Maximize Creditor Protection
- Formation of Management Companies to protect Accounts Receivable and other assets
- Formation of Limited Partnerships and Limited Liability Companies
- Formation of Domestic Asset Protection Trusts
- Fraudulent Conveyance Issues