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Asset Protection: Building Limits is the Best Defense

by admin on March 20, 2017 No comments

By: Susan St. John

Should you consider asset protection planning as part of your estate planning? The short answer to this question is yes if you have significant assets, will inherit sizable assets, or work in a profession that is routinely sued pursuant to medical malpractice complaints. In particular, healthcare professionals should go the extra mile when it comes to asset protection in light of the McCall and Kalitan cases out of the Florida Supreme Court and Fourth District Court of Appeals, respectively, invalidating the limit on non-economic damages in medical malpractice cases. So how can asset protection be accomplished?

Protecting your assets and preserving wealth can be accomplished through a variety of planning techniques. These techniques are used to protect assets from being wasted or levied against in a medical malpractice suit. Asset protection planning is part of estate planning, which should be reviewed whenever an individual has a significant change in life circumstances, becomes aware he or she will inherit a sizable investment or asset, or enters a profession that is considered to carry considerable risk.

The intent of asset protection is to protect assets from waste or exposure to potential creditors, without concealment or tax evasion. Asset protection can preserve wealth for use later in life or to be passed on to descendants, that is, children or grandchildren, or perhaps other family members.

Asset protection can be maximized through various vehicles such as:

  1. Owning assets, such as real property or limited liability companies, with a spouse as tenants by the entirety;
  2. Setting up irrevocable trusts; and
  3. Maintaining adequate insurance coverage.

It is important to keep in mind that setting up asset protection vehicles is not to be done in an effort to thwart current creditors, or even future creditors whose claims can reasonably be anticipated. Attempting asset protection or transferring assets out of the reach of current or reasonably ascertainable creditors will run afoul of the Florida Uniform Fraudulent Transfer Act, resulting in a fraudulent transfer of assets. The Florida Uniform Fraudulent Transfer Act applies to assets commonly referred to as “non-exempt” assets, meaning such assets are not exempt from claims of creditors. Exempt assets, are defined by law, and are exempt from creditors’ claims, unless the exempt asset itself is subject to a mortgage or lien.

Examples of exempt assets include, but are not limited to:

  • a homestead;
  • a vehicle as long as the equity in the vehicle does not exceed $1,000;
  • personal property limited in value to $4,000 if a homestead exemption is not claimed;
  • qualified retirement plans;
  • property owned by spouses as tenants by the entirety.

Florida case law provides that property owned as tenants by the entirety may be transferred to the non-debtor spouse and estate planning arranged so that if the non-debtor spouse dies first, the debtor spouse will not inherit the property back, making it subject to the debtor spouse’s creditors. Keep in mind that property, whether considered exempt or not, that is subject to encumbrances like a mortgage, HELOC, or other lien against the property, transfer subject to the encumbrances.

By way of example, if husband and wife own vacation real property as tenants by the entirety, this property is exempt from the claims of creditors. However, if wife, a physician, has claims against her arising from a judgment in malpractice and husband should die first, the vacation real property is now owned solely by the wife, and her creditors’ claims could attach to the house and she may even be forced to sell it since it is not exempt property. But, with a little planning, husband and wife could transfer the vacation real property to husband and then create an estate plan that does not pass the vacation real property back to wife. The vacation real property could be passed to children or grandchildren, or better yet, a trust that is not revocable by wife. Thus, the vacation real property is preserved and is kept beyond the reach of wife’s creditors.

Alternatively, the husband and wife could transfer the vacation real property to an LLC owned by them as tenants by the entirety. The LLC operating agreement would need to include provisions for directing membership interests when either spouse passes away.

Still another alternative is for husband and wife to establish an irrevocable trust, and contribute the property to the trust or contribute some membership interest in the LLC that holds the property to the trust while holding remaining membership interest in the LLC as tenants by entirety.

What if you are not married and want to preserve your assets for the future? You could invest in homestead property as this is a protected, exempt asset, generally beyond the reach of creditors. Or you could establish an irrevocable trust and contribute assets to the trust. Since the trust would own the assets, and it is irrevocable unlike a Revocable Living Trust, the assets inside the trust would be beyond the reach of creditors. Although, you could be a beneficiary of the irrevocable trust, you will not be able to change trust terms and you cannot be the trustee. Once you pass away, the assets held by the trust could be distributed to other beneficiaries, or remain in trust for the benefit of other beneficiaries.

If you will inherit a sizable investment or asset, the benefactor could put the investment or asset inside a trust for you and include provisions mitigating the potential reach from your creditors. This generally works well, but may not exclude claims for child support obligations owed by you.

Additionally, keep in mind that maintaining adequate insurance coverage over assets is an important part of protecting those assets. For example, make sure real or personal property has adequate insurance to protect from unforeseen events such as storm or fire damage, theft, or other forms of loss. Also, remember to maintain adequate insurance or self-insurance if you are engaged in a profession with considerable risk for lawsuits.

Finally, keep in mind that asset protection is easier to effectuate prior to an individual being subjected to the claims of creditors. Transfers of property that are fraudulent or made solely to keep the property from creditors can be unwound. Therefore, early planning is essential to preserving assets you have worked hard to acquire or might inherit from others.

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