Protection for Cash in Homestead Accounts

I’ve recently been fielding a lot of questions about asset protection for homestead properties. Florida’s homestead exemption offers excellent protection. Texas asset protection laws also afford strong protections to the homestead. One question that comes up from time to time relates to cash received for the sale of a homestead. I recommend that clients keep such cash in a completely segregated account, or a homestead account. A homestead account is an account that contains only money from the sale of a property that was protected under homestead exemption laws. This must be a segregated account that contains no other money, and courts are usually pretty good about protecting segregated homestead accounts from creditor claims, especially in the context of bankruptcy.

Duration of Protection

The beautiful feature of homestead protection is that it lasts forever, and you don’t typically have to jump through many hoops to get it. It’s the  ultimate asset protection tool, because in states where the exemption is unlimited (e.g. Florida and Texas), one can invest all their money into a homesteaded property and effectively protect wealth (though it’s certainly not the best way to grow wealth) without having to worry about other asset protection tools.

Again, the duration of the homestead exemption is forever, but how long is the protection from creditors afforded to homestead accounts? There isn’t a clear answer on that. Time is certainly a factor, but there are many other factors to consider as well. A bankruptcy court in Florida recently considered this question and allowed the debtor to exempt a 13 month old homestead account from creditor claims. While that seems generous (and I don’t recommend trying to hold a homestead account for that long), the court weighed several factors besides time alone in reaching its decision.

In reaching its decision, the court noted that during the 13 month period, the debtor seriously considered the purchase of between 6 and 12 different houses. The debtor also submitted written offers to purchase three different homes, and the debtor actually signed a contract on another home. Unfortunately none of the deals came to fruition, even though the prices offered were reasonable in the opinion of the bankruptcy judge. In one case, a contract for purchase simply fell apart because of structural issues revealed in the home after a professional inspection.

Homestead Account Advice

While the Florida case described above certainly extends a measure of protection for homestead accounts in Florida, its not applicable in states outside of Florida. Homestead laws vary drastically from state to state. Some states provide absolutely no homestead protection, while others like Texas and Florida give unlimited protection.  If you live in a state where the laws are not favorable to homesteads, you need to consult with an asset protection attorney to determine how you can safely and legally protect your wealth and hard earned assets.

While homesteads can present a challenge from the standpoint of estate planning for couples that don’t want to use homesteads as a non-probate asset, the cost of more involved estate planning is a small price to pay for the asset protection benefits garnered from the statutory (or constitutionally) derived mechanism.

The Economist

Just wanted to quickly highlight a recent asset protection article in the Economist. In talking about the value of asset protection, the article says the following:

The best protection for assets of all kinds is anonymity. They should be kept in offshore companies and trusts, in multiple jurisdictions with unclear ownership and minimal reporting requirements. Unfortunately, politicians are making these arrangements increasingly difficult to maintain. The G8 Summit in June is likely to see a new push to limit shell companies, and force existing ones to reveal their beneficial ownership. Mirkwood, with the help of its public-relations subsidiary, Schmoez and DeSeeve, is taking every opportunity to remind decision-makers of the importance of privacy to the high-net-worth individuals who support so many of them. Later this year we will hold a fund-raising dinner for a politician from Delaware, home to 917,000 people and 945,000 obviously legitimate but gloriously impenetrable companies.

Secrecy is your friend. Sadly, Luxembourg and Switzerland, once paragons of discretion, have buckled under pressure from the United States and European Union, but it is still possible to conduct transactions away from prying eyes. We continue to offer advice to clients, with an emphasis on emerging-economy jurisdictions such as Dubai, Shanghai and Mumbai, and to use helpful judicial systems to ward off intrusive journalists. Britain has some vicious and unscrupulous lawyers who can spot a libel in any sentence (even this one).

You can read the rest of the article here.

Administrative Compliance – A Necessary Pain

If you don’t manage the administrative end of your business well, then your asset protection structures are potential liabilities. Judges can and often do pierce the corporate veil. There are specific actions you can take to fully leverage asset protection laws while minimizing your domestic risk exposure. All of these are things that need to be done BEFORE you go offshore. This article applies no matter where you live in the U.S., but for demonstation purposes, I’m going to focus on Texas Asset Protection Law.

Asset Protection – A Broad Area of Law

Asset protection law is not an area of law that’s confined to a finite set of legal principles. To fully leverage and take advantage of asset protection laws, good asset protection attorneys must be versed in corporate, estate, trust, and employment laws, to name a few. With respect to corporate law and the issue of choosing a business entity (e.g. LLC vs. FLP vs. Corporation), one major risk is that a court could “pierce the corporate veil. In other words, in same cases the courts allow creditors to “break” the protections provided by business entities and pursue individual partners, shareholders, or members to satisfy legal claims.

Inside vs. Outside Liabilities

To fully understand this concept, it’s important to first understand the difference between inside and outside liabilities. Inside liabilities are liabilities directly incurred by a business entity. The business entity itself is solely responsible for these claims, in theory at least. Outside liabilities are those incurred by individual members, partners, or shareholders outside of the guise of corporate action. Again, in theory the individuals who incurred the liabilities should be solely responsible for meeting the obligations.

Comply With Corporate Formalities for Maximum Asset Protection

Corporate asset protection law protects shareholders, partners, and members of business entities from creditor claims agains the business entity itself. In other words, inside liability creditors are (in theory) only permitted to seize, levy, and otherwise execute on the assets of the business entity itself to satisfy their claims. So keeping your business entity “slim on assets” is an easy way to take full advantage of domestic asset protection laws, right? Unfortunately, “undercapitalization” is one of many factors that court consider when deciding whether or not to pierce the corporate veil — when deciding whether it is lawfully appropriate to look to the assets of individual shareholders, members, or partners to satisfy corporate obligations.

Although veil piercing laws vary according to jurisdiction (e.g. Texas Asset Protection Laws differ from Florida or California Asset Protection), there are a few things you can do now to minimize the chance that a court will pierce the corporation in the event that your business is sued:

  1. Make sure that the formation documents for your business entity have been filed with the Secretary of State in your jurisdiction, and make sure that you have the appropriate organizational and operational governing documents. If your business is formed in a state other than the state where it primarily operates, check with an attorney as to whether your business needs to be qualified in the states where it has a presence.
  2. Conduct all required meetings. Depending on your state and the type of asset protection entity you have, you might be required to have records of an initial organizational meeting and/or other required meetings (e.g. annual board of directors meeting). In Texas, a corporation is required to have $1,000 in capital before it can begin operating or incur debt. Does your state have a similar requirement?
  3. Document business transactions and keep records of internal business meetings. Always use the name of your business entity (and not your personal name) when transacting business and in advertisements. Unless you are a professional (doctor, dentist, chiropractor, lawyer, etc.), your business needs to operate under its own name. No exceptions.
  4. Maintain a separate checking account for your business, and make sure that business assets are titled in the name of the business itself. Treat your business as if it is a separate person — as if it is a person with a jealous desire to maintain its own autonomy. Never operate your business or allow it to own assets in any capacity as your own alter-ego.

In addition to maximizing the effectiveness of asset protection planing, business owners with high potential liabilities (e.g. surgeons) should conduct a reasoned cost-benefit analysis on the question of professional and/or business liability insurance. Such insurance should include general liability, professional liability (errors & omissions or malpractice), officer and director, workers compensation, and property damage.

If you have been a business owner for any amount of time, you have probably heard all the advice in this article before, but it is important an important subject — important enough to be revisited from time to time. It’s also worth the effort to set up some simple methods of “automatic compliance” so that nothing slips through the cracks. It’s the only way to take full advantage of asset protection laws.

Very Old (And Good) Legal Tools

Back in the days when I used to be a law clerk, the judge I worked for would love it when I cited very old case law in legal memos. He would say, “I hope that people are still citing my opinions in 200 years.”

Asset protection structures and mechanisms have been around for centuries. Throughout time, the wealthiest people on earth take advantage of asset protection planning. History shows that wealthy people always have pursued asset protection as a goal.  A simple limited liability company, for example, is an asset protection structure. The primary reason that entities like family limited partnerships, corporations, and limited liability companies exist is to partition risk and liability and, therefore, protect assets.

Many people are unaware of the asset protection laws that are all around us. In fact, I’m often asked about the legality of certain asset protection strategies that are completely tried and true. As an asset protection attorney, I am a student of history, and I want to share a little bit about the past with respect to asset protection.

Living in Perpetuity

The word “corporation” derives from the Latin corpusCorpus refers to a group or body of people. At least with respect to Medieval European business entities, the original idea behind a corporation was that it would allow a body of people to survive “in perpetuity” and not be limited by the lives of any single stockholder.

The Catholic Church was actually one of the first European organizations that took advantage of a “perpetual existence.” Many municipal governments, like the City of London Corporation, were also formed nearly 1,000 years ago when William the Conqueror granted the city a royal charter. In terms of commercial enterprises, the Dutch East India Company played a major role in exploring the world and issued what were probably the first stock certificates. That all happened in the 1600’s. A major feature of the Dutch East India Company was the limitation of liability for shareholders. Today we call that asset protection.

Asset Protection Has Been Around For A Long Time

The message here is that asset protection is legal. It has been around for a long, long time. Many state have adopted the policies of offshore asset protection jurisdictions. There is absolutely nothing illegal about using every advantage conferred by law for the protection of wealth. Some people question the use of offshore trusts as “taking it to the edge,” but the fact of the matter is that individuals and corporations have always availed themselves of international laws for the preservation of wealth. That’s history . . . .

The historical record, combined with the fact that privacy seems to erode more and more every day, along with wealth and assets being more accessible today than ever before, no matter where those assets are located, are factors that make asset protection an absolute necessity. In fact, the only real risk you can take is to ignore the potential benefits of placing a legal fortress around your wealth. Follow the lead of the smartest and wealthiest people who ever lived, and take the time to develop a comprehensive asset protection strategy.

Charging Order Misconceptions

In terms of new business entity formations, the Limited Liability Companies (“LLCs”) are the king. The former ruler of the land – the corporation – has been dethroned after a viscous coup. Very few corporations are now being formed for asset protection reasons. In fact, unless one hopes to eventually take a company public or has some other unique requirement (e.g. employee benefit plans), there is very little reason to use the corporate form of ownership.

Charging Order Protected Entity

The Limited Liability Company has become popular because it offers decentralized (read “relaxed”) management and bookkeeping. LLC statutes have dispensed with the need for a Board of Directors, not to mention the need for a Board resolution every time somebody wants to flip a light switch. Limited liability companies also offer relaxed bookkeeping requirements, and they are taxed as partnerships by default (though an LLC can be disregarded if single-member or elect to be treated as a corporation or S-Corporation).

Probably the biggest driver behind the formation of many LLCs, as with Limited Partnerships (“LPs”), is the existence of statutory “charging order protection.” Simply, this means that if a member of an LLC becomes a debtor, the creditors do not get direct assets to LLC’s assets or even ownership of the debtor’s LLC membership interest. Creditors are prohibited by law (in some states) from levying on the interests of an LLC. This is exactly the opposite of what happens in the context of corporations, where creditors can simply seize the ownership interests.

Liens Instead of Seizures

Rather than take control of a debtor’s membership interest in an LLC, creditors are limited to getting a lien against the debtor/member’s LLC interest. These liens lasts until their underlying judgments are satisfied. This means, more specifically, that a creditor gets only a lien against whatever distributions of income that the LLC makes to the debtor/member, if any distributions are made at all.

In my mind, this makes LLCs a lot like country clubs, where membership can be exclusive and unwanted people can be barred from membership.

Charging Order Misconceptions

The charging order is surrounded by misconceptions. The charging order itself is not a lien. Rather, the lien is put in place by the charging order. Think of the charging order as gun. The lien is a bullet. The charging order is the mechanism by which the lien is placed on the debtor’s membership interest. The charging order itself is not the lien.

Under most LLC laws, the charging order is the “exclusive remedy” that a creditor can use to pursue a debtor’s LLC membership interest. The term “remedy” is a term of art in this context. It doesn’t mean an “outcome,” which is the reason that so many planners misunderstand it. The charging order is the “remedy” that a creditor must use in this situation. It means that other “remedies” like levies, garnishments, assignment orders, etc. simply aren’t available.

If a creditor has an alternative avenue to attack an LLC (e.g. alter ego theory), if it is not defined as a “remedy” then it is not blocked by charging order exclusivity. There have been instances where creditors have been able to circumvent the charging order procedure by attacking the LLC itself as opposed to attacking the debtor.

The purpose of a charging order is not to protect debtors. Instead, charging order exclusivity exists so that the other, non-debtor members of the LLC aren’t forced into involuntary business relationships with another member’s creditor(s) or ex-spouse. Again, think about it like a country club with exclusive membership rights. This rationale for the existence of charging order protection is important. Based on that rationale, some courts have effectively held that if all member of an LLC are debtors of the same creditor, then the charging order protection should not exist. This often occurs in the case of single-member LLCs (i.e. where there is only one member who is also a debtor). It also occurs when all of the members of an LLC are co-guarantors of the same line of credit, as an example.

Remember, a charging order gives creditors the right to lien a debtor’s membership interest. That means the creditor can intercept distributions. The creditor is not a “member”and has no right to become a member, and is therefore not liable for the taxes of the LLC that flow through to members. One of the biggest lies told by asset protection marketers is that “the creditors get the tax bill even though they can’t touch the assets.” To the contrary, if distributions are made to the debtor pursuant to his or her economic rights, then the creditor gets to intercept the cash and NOT the tax bill, which still belongs to the debtor! Wowza!

Some asset protection planners (liars) tell their clients something like, “You can always access cash in the LLC through loans, salary, etc.” Sounds great, right? Only in theory and by asset protection attorneys who have never been in court, in front of a judge, and have ZERO experience with actual charging orders. In practice, court issued charging orders are usually loaded with all sorts of prohibitions that specifically prevent the making of loans or payment of salary or fees to the debtor. Anything and everything that can be considered a distribution is subject to being intercepted.

What often happens is an Old West style standoff between creditors and debtors. The creditor can’t access the assets while they’re inside the LLC, and the debtor can’t distribute the assets from the entity. The creditor can almost always win if they are patient, especially if the creditor doesn’t have an urgent need for the cash (e.g. if the creditor is a bank or other institutional investor). Nonetheless, almost all of these types of cases settle, but debtor usually gets the short end of the stick at the negotiating table.

Charging orders are too nuanced to discuss every detail of them here, but suffice it to say that charging orders present complicated issues of law. They are even more complicated when the law is applied to particular fact patterns. The moral of the story is quite simple. LLCs and FLPs aren’t enough to protect your assets completely.

Overcome Medical Malpractice Stress

Potential malpractice lawsuits are one of the most stressful burdens faced by members of the medical profession. Dealing with that stress can compromise a physician’s ability to provide quality care for his or her patients, especially if a medical professional is facing existing litigation. Florida asset protection attorneys say that doctors, nurses, and other medical professionals who actually face litigation often lose sight of the reasons they joined the medical field. In many cases, litigation can even have a negative impact on one’s sense of self-worth within the medical profession.

Avoid Malpractice Suits With Asset Protection

While the medical profession continues to make advances in the modern age, the legal system is lagging far behind. Dissatisfied patients with a profit motive often turn to litigation. In some cases, patients just feel exhausted from battling medical conditions that are beyond anyone’s control. Unfortunately, lawsuits fail to adequately address true underlying issues and, instead, focus on money. A cycle of blame is started that begins and ends with treating physician. The increasing acceptance of a litigious attitude in society only serves to encourage the tide of lawsuits filed each and every year. Attorneys are to blame. They profit more than anyone from litigation, and they have mass marketed litigation as “the solution to your problem.”

Physicians sued for malpractice many times find themselves unfairly saddled with stigma, even in circumstances where lawsuits are based on factors beyond any doctor’s control–mistakes caused by systemic errors, harm associated with disease, or illness. A malpractice suit effectively casts blame on the doctor. The term “malpractice” is often enough to evoke the image of an incompetent or careless doctor, when in fact this is often not the case, many Florida medical malpractice lawyers say.

Stress caused by medical malpractice or just the threat of medical malpractice is an often-ignored syndrome in doctors, nurses, and medical technicians who are forced to defend themselves, their professions, and their livelihoods against malpractice lawsuits. Malpractice suits are time-consuming and costly. They can be strung out for years in court, leaving participants feeling as though there is no end in sight. Recognizing and responsibly handling stress is important for any physician, especially a physician facing a potential malpractice lawsuit. Acute or chronic anxiety and depression are the prominent symptom of medical malpractice stress syndrome.

Other signs that a health care professional might be suffering from medical malpractice stress syndrome include:

  • Anxiety
  • Fatigue
  • Disruption/Change in Sleeping Habits
  • Feelings of isolation
  • Change in Eating Habits
  • Diminished Self-Esteem
  • Agitation, Inability to Relax
  • Moodiness or Irritability
  • Diminished sex-drive
  • Uncharacteristic Substance Abuse

All of the symptoms listed above have the potential to interrupt a physician’s well-being They can make it difficult to perform even the simplest of tasks. Other symptoms can be found here.

Medical professionals can battle these symptoms by acknowledging that they need help and then seeking support from friends, family and professional colleagues. Depending on the severity of the anxiety or depression associated with the medical malpractice stress syndrome, the physician may wish to seek medical or mental health attention. Health care providers should also retain an experienced medical malpractice lawyer who can alleviate some pressure by offering legal guidance throughout the duration of the case.

The Best Solution

Win the case before it’s ever filed against you. Take the target off your back before you ever face a medical malpractice lawsuit. The way to do that is by setting up an asset protection strategy that fully protects you and your family. Then, attorneys simply won’t want to target you in lawsuits.