What Floridians Need to Know about Asset Protection
By: Barry E. Haimo, Esq.
May 1, 2024
There isn’t a person who exists who doesn’t want to protect their assets. You’ve worked hard for what you have — however much that is — and you want to make sure it doesn’t get snatched away by taxes, creditors, or just plain litigious folk.
Thankfully, there are all kinds of tools out there designed to help you hold on to your assets. That being said, you have to understand how to utilize those tools, which ones are best suited to your specific situation, and how to avoid running afoul of possible legal problems.
Florida Asset Protection: The Basics
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Hi. Thanks for tuning in to another dose of Bite-Sized Bits of Knowledge, where we give you meaningful information in a short amount of time. Today, we’re going to talk about asset protection super-high level, and I just want to impress upon you that there’s a lot you can do when it comes to asset protection, but it’s a wormhole.
Starting from the top, typically most states have protections that are codified by statute or common law, and I would recommend starting there. In Florida, for example, you have your assets that are protected, like Homestead, for example. Or retirement accounts. These are things that are protected. There’s exceptions to everything, of course, but you have your little waterfall of assets that are protected.
Beyond that, you have things you can do with certain types of trusts and certain types of businesses that have benefits if structured properly. Of course, insurance is always the first line of defense, but we all know that insurance companies like to reject claims, and that’s why you start to think about these other options. Florida is relatively straightforward. You have your waterfall, you have your insurance, some businesses, some trust.
You can always go exotic and go to other states like South Dakota. They have very favorable trust laws, self-settled asset protection trusts, Alaska as well. You can also go offshore to countries like Nevis. But when we’re talking exotic, planning requires big budgets.
When it comes to asset protection planning, you want to do it right, and of course, subject to your budget. The things I would mention before I conclude here are that you need to be mindful of when you’re doing your planning. Planning is totally allowed. There’s nothing wrong with it. But if you’re doing it the wrong time, there’s something very wrong with it.
There’s something called the Fraudulent Conveyance Act, or the Fraudulent Transfers Act, depending on the state you’re talking about. And so these types of transfers will unwind all of your planning. So the question is, when does it take effect? And that requires really understanding the Fraudulent Conveyance Act and how it works.
And so to give you a super high level of how that works, obviously, if you’re intentionally defrauding creditors or intentionally making yourself insolvent so you can’t pay creditors, that’s not allowed. But the act basically looks at, not subjective intent, but objective intent. And it says, “Okay, well, here’s a laundry list of things that if you do, you’re deemed to have the intent to have defrauded creditors.”
So things like that are like, the difference between “Are you in a lawsuit? Is the lawsuit filed? Has there even been a demand letter?” Versus “Do you have a judgment where you’ve lost and they’re trying to collect?” That time horizon matters of when you’re doing your plan.
In other words, has the issue arisen to the point of there’s a cause of action, there’s a claim filed, versus has it already been adjudicated and you’ve been deemed liable and you’re trying to avoid it? That’s just an example, or one of many examples, of where the Fraudulent Conveyances Act could unwind your planning.
So you really want to do it the right way at the right time. And before you have a problem, that’s the right time. So we can help you with that. We do a lot of it, and we’re happy to talk to you further about how we approach doing it. So that’s all for today. Thank you for stopping by, and stay tuned for more.
Now that you understand some basics, let’s take a look at some different ways that you can protect your assets from lawsuits.
Five Ways to Protect Your Assets from Lawsuits
A quick internet search reveals that some of the world’s richest people often experience lawsuits that threaten their wealth. The larger your estate, the greater your need to protect your assets from lawsuits.
Bill and Melinda Gates are currently in the public eye for their divorce after 27 years. Dividing up $148 billion dollars in public and private assets — including a massive philanthropic foundation — is no easy feat!
Anyone with a vested interest in their own wealth management should know a handful of ways to safeguard their assets. Remember, there are always potential threats to your hard-earned wealth:
- Liability Lawsuits
- Creditors
- Divorce
- Bankruptcy
These are just the tip of the iceberg. But if you are proactive about your asset protection and armed with the following strategies, you can rest easier.
Obtain Solid Liability Insurance
Have you upgraded your insurance lately? If you haven’t, this is the first step you should take to protect your assets from lawsuits. Many individuals are under-insured without even realizing it.
An adequate “umbrella policy” of liability insurance includes at least automobile insurance and homeowner’s insurance, and ideally covers millions of dollars of potential damages. If you are a business owner, consider increasing the liability coverage on your company’s policy. The greater your wealth, the greater your liability coverage should be in terms of dollars.
Then make sure you understand your policy details, limits, and exclusions so you are not blindsided by an unexpected legal claim. In the event you are sued, the cost of good liability insurance is minimal compared to what you could pay in court without adequate coverage.
Jointly Own Assets
One simple asset protection strategy is to jointly own assets. When you have a lot of wealth accumulated, litigious creditors and claimants may look for any way to get their hands on it. By putting your assets in both your name and in the name of a spouse, family member, or business partner, you create an additional obstacle to creditors. Now instead of seizing a portion of your estate, the creditor shares the assets with that other person.
Then creditors have to file costly legal actions, which make pursuing your assets tedious and less attractive. There are even laws in some states that forbid partitioning jointly held assets and help protect a couple’s belongings.
Open an LLC or Limited Partnerships to Protect Assets from Lawsuits
Similar to jointly owned assets, an LLC or limited partnerships can provide additional protection against money-hungry creditors. If you own or have shares in a business, a properly structured LLC can help protect your personal assets from any liabilities you incur as part of the business.
Additionally, at least in Florida and some other states, creditors can only seize your economic interest in the LLC and cannot take the shares away from you. This is far more desirable than losing the business to a creditor — and provides some leverage in which to negotiate a settlement.
Contribute to Your Retirement Accounts and Life Insurance
Do you have an IRA, 401k, annuity, or life insurance? By contributing regularly to a retirement account or life insurance, you are ensuring those funds receive certain protections against creditors. Employer-administered plans are subject to protection under federal law (ERISA).
Assets in qualifying retirement plans and employee welfare benefit plans, such a 401(k), 403(b) and pension plans cannot be seized by creditors. Only the IRS and spouses can lay claim to these funds.
Establish the Right Kind of Trust
Lastly, you want to have the right kind of trust to ensure your assets are received by your chosen beneficiaries. There are various types of trusts to consider, including:
- Discretionary trusts
- Qualified trusts
- Support trusts
- Personal trusts
Revocable trusts are not helpful in this regard. The key is that your trust be irrevocable and be structured the right way to protect your assets. Creating a trust can be complicated and have multiple steps. Understanding the process and consulting with an attorney can help you establish the right kind of trust for your needs.
It is essential to be proactive when protecting your assets from lawsuits. Unfortunately, many people don’t take thoughtful action until they are facing a legal dilemma. Don’t wait until you are involved with a creditor, bankruptcy, divorce, or civil court case.
Do Your Children Need Asset Protection?
Something many people do not consider is asset protection for their kids. After all, they’re just kids, right? But if you have children, they absolutely need asset protection.
Indeed, most people who have children hope to leave some form of inheritance to them. In many cases, it’s the driving force behind continuing to work well beyond a time you ever thought you would. Said differently, it could mean the difference between having a meaningful head start and not having one.
So why in the world wouldn’t you take necessary precautions to protect the hard-earned wealth you hope to pass along? Without them, as you probably already know, the phrase “easy come, easy go” is far more likely to apply to your assets than it would otherwise. Furthermore, when parents don’t safeguard family wealth, sometimes an inheritance winds up causing more harm than good in their children’s lives.
Now that you know your children need asset protection, learn a little more about what you can do to ensure they have it.
Creating a Family Trust for Your Children
The first suggestion most estate planning professionals will make regarding inheritance is to place money and assets in a trust. Essentially, you sign over all the assets and funds you want to eventually go to your children to a trust account.
Most parents set up their family trusts so that they retain full control of these assets until death or otherwise stipulated. This is a great way to shield assets from creditors, catastrophic events, and even certain people that come in and out of your children’s lives that may not have their best interests in mind like spouses and creditors. However, in Florida, this protection is limited to after death and in most cases not during life.
The most common distribution recommendation is to keep trust assets in trust and enable your beneficiaries to control portions upon reaching certain ages (for example, half of the balance at age 25, and the other half at age 50 for each child). We, however, think that in many cases this kind of age-based distribution is a mistake.
The problem is, your family assets then become 100-percent at-risk to the world — including the beneficiary — upon distribution. You need to evaluate whether this is really what you want to do with your legacy. For some, it is exactly what they wish. For others, it isn’t.
The Lifetime Asset Protection Trust (LAPT)
Some parents elect to fund a Lifetime Asset Protection Trust, or LAPT. When they do, they still decide to gift certain assets to their children (usually following big life events or at those predetermined ages), but the trust retains ownership of it, not the kids.
An Outline of Ownership. When the paperwork reflects ownership as belonging to the trust, if structured properly, the assets remain shielded from other (not-so-great) life events like divorce and bankruptcy. In other words, your children can’t lose those assets because they never owned them outright in the first place.
Greater Discretionary Power. Another advantage is a greater discretionary power for trustees. Your chosen trustee(s) may distribute assets as they see fit at their discretion — a primary reason your selection process should be done very carefully — instead of having to commit to a more rigid structuring. This allows the flexibility to consider unforeseen circumstances (whether good or bad). You can always build in a trust advisor or protector to oversee the trustee who has broad discretion as a system of checks and balances.
Teachable Moments. Some parents even incentivize their children to meet certain life goals — education, business, and so on. Others choose to utilize this estate planning tool as a teaching instrument for things like business, charitable giving, or investing by naming children as co-trustees with someone they believe would make a good mentor for any of these financial endeavors.
Flexible Set-Up. There are a variety of options for how to set up this kind of trust. Whether as a stand-alone or built within a revocable trust (that becomes irrevocable when you pass on), it’s an option that can protect your children’s assets for their lifetime.
As you can see, there’s a lot to learn about asset protection. If you have questions, don’t hesitate to reach out to Haimo Law. Whatever your wishes for passing down your estate, a team of experienced planning professionals can help you pass on and protect your legacy.
Originally published 11/18/2021. Updated 05/01/2024.
Author:
Barry E. Haimo, Esq.
Haimo Law
Strategic Planning With Purpose®
Email: barry@haimolaw.com
YouTube: http://www.youtube.com/user/haimolawtv
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