Tenants by the Entireties: A Viable Asset Protection Strategy?

In Florida, the answer is “YES.” Tenancy by the entirety is alive and well in Florida asset protection law.

Some other states recognize the common law asset protection doctrine of tenancy by the entirety too. Tenancy by the entirety is a form of ownership that, as a matter of law, can only exist between a husband and wife when they opt for it. The other attributes of this form of ownership are the concepts of common time (i.e. it can only exist during the marriage), right of survivorship, and undivided interest.

These attributes basically mean that married couples own their property “together,” in every sense of the word.  And if one spouse dies, the other spouse automatically takes sole ownership of the property, but that ownership is as an individual. The tenancy and all of its benefits disappear when when one spouse passes on.

Tenants by the Entireties: The  Asset Protection Benefits

With respect to asset protection planning, a tenancy by the entirety provides a lot of protection while the tenancy is in place. Neither spouse acting alone can transfer property out of a tenancy by the entirety. Rather, the consent of both spouses is required. That feature provides “built-in” asset protection. If one spouse is sued or incurs a liability of (almost) any kind, assets held in a tenancy by the entirety are exempt. They can’t be accessed to satisfy a claim that exists just one spouse.

Using Tenancy by the Entirety for Asset Protection

In families where both spouses work, a tenancy by the entirety can be used to protect those cash. That can be done by having separate incomes deposited into a bank account that’s owned by the married couple as tenants by the entirety. This method is especially effective in households where one spouse is a physician, dentist, or lawyer in a state where profits can only be shared with other licensed professionals (e.g. Florida attorneys). Income from the professional practice can be protected against potential malpractice suits by having it deposited into a tenancy by the entirety account. But there is a catch: You have to be consistent. It simply won’t be effective if you wait until a lawsuit or other claim is asserted before you begin, or a judge might just decide to “undo” your efforts. For regular paychecks and profit distributions, it makes sense to consider having income direct deposited into a tenants by the entirety bank account. That makes the protection automatic.

Where It Doesn’t Work To Protect Assets

Tenancy by the entirety is a weak form of asset protection in some scenarios. One obvious weakness is that property held in this form of ownership is accessible by a married couple’s joint creditors. So if you both “signed on the dotted line” for that loan that’s now going bad, T by E probably isn’t going to offer very much protection. Property also loses the protections if a couple divorces and/or upon the death of a non-debtor spouse (i.e. the death of the spouse who is “free and clear”). Also, in order to take advantage of a tenancy by the entirety in bankruptcy, a couple would have to to opt for state exemptions rather than the federal exemptions, because the doctrine of tenancy by the entirety simply isn’t recognized by the federal bankruptcy code. To overcome these weaknesses, it’s a good idea to use a limited liability company, in addition to tenancy by the entirety. That way your bases are really covered.

You can find of list of states that recognize the doctrine of tenancy by the entirety here (though I can’t vouch for its accuracy or when it was last updated).

If you have questions about tenancy by the entirety and want to know if it’s available in your state, please call us today. We’d be happy to spend some time discussing it and your other asset protection questions. If you want to learn more about the legal doctrine tenancy by the entirety in general, check out this very helpful paper written by a bankruptcy judge: Tenancy by the Entirety in Bankruptcy or click here to download the paper.

Asset Protection Articles

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Funding Asset Protection Plans The Right Way

Lately, I’ve been fielding a lot of interesting calls  regarding “unfunded” asset protection plans.  An asset protection plan–a domestic entity like a limited liability company combined with an offshore asset protection trust–is only useful to protect assets against lawsuits and other creditors if there are actually assets titled in the name of the plan.  In other words, an asset protection plan is pretty much useless if it doesn’t actually have assets in it. Funding asset protection plans isn’t difficult work, but it’s extremely important and will take some effort on your part. It’s worth taking the time to get it right, and you should get started immediately.

Basics of Funding Asset Protection Plans

  • Primary and Second Residential Homes (i.e. homes that you actually use and don’t rent)

When funding asset protection plans, the first asset you should think about is your home. If you live in a state with strong homestead protection like Florida or Texas, then you don’t need to do anything.  Your home is exempt from creditor claims and completely protected. If, on the other hand, you live in a state like California and have a house that exceeds the limited homestead protection, then you need to take action to protect your home. The typical way to do that is to “deed” your home into your asset protection trust. The same rule applies for any second homes that you own but don’t rent (e.g. family vacation home in the mountains). By the way, this will work even if you don’t fully own the second home. For example, if you are partners with other family members, you can still deed your share of the residence into your asset protection plan.

  • Rental Properties

Rental properties carry more risk for their owners than non-rental properties.  As a result, you need to insulate them or compartmentalize that risk so that it doesn’t place an unnecessary risk on your other assets (e.g. cash, stocks, bonds).  That compartmentalization and risk insulation is achieved through the use of a limited liability company (an “LLC”) that is a subsidiary of you master limited liability company.  It works like this:

  1. The subsidiary LLC is created, and it is owned in the exact same proportions as the rental property (e.g. if you own the rental property yourself, you will need to own 100% of the LLC).
  2. Deed the rental property into the subsidiary LLC.
  3. Transfer the subsidiary LLC into your asset protection plan (i.e. the Master LLC or directly into the asset protection trust).

By following those steps precisely when funding asset protection plans, you can in some instances avoid transfer taxes and/or a reassessment for local tax purposes (always check with your local taxing authority and clerk of court to get the specific details regarding your state and county). Click here to download a guide for Florida or click here to read the Florida Funding Guide online.

  • Safe Assets a.k.a Assets That Can’t Cause Liabilities

Cash, stocks, bonds, precious metals, jewelry, valuable coins, antiques, art, and other collectibles like very expensive wine are all considered “safe assets.”  They are considered safe, because they can’t independently generate liabilities for you. People can get hurt in your houses, on your boat, in your car, and on airplanes. That’s just not true of safe assets. Because safe assets can’t harm others or cause independent liabilities, your master limited liability company can directly own safe assets, without the need to first place those assets into a subsidiary LLC.

  • Vehicles

Vehicles are risky assets. They have the potential to generat lots of liabilities. As a result, personal vehicles should be left outside your plan completely, and business vehicles should be owned either by their respective businesses or, even better, by a separate vehicle leasing LLC.  Own vehicles in your personal name, carry appropriate insurance to cover the cost of a legal defense if you’re involved in an accident, and trust that your other assets are safely protected in your asset protection plan

If you have questions on funding asset protection plans . . . .

If you have questions about funding asset protection plans, or if you’re interested to develop an asset protection strategy, call MWPatton Asset Protection Attorney today. We’ll be happy to answer your questions and provide you with a full asset protection analysis. Also, take the time to read this very good article on the adverse effects of an unfunded or improperly funded asset protection plans: Funding The Foreign Asset Protection Trust or click here to read it online.

Funding

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When Change Feels Wrong: Perspective of an Asset Protection Attorney

“Life is Difficult”
Dr. Scott Peck in The Road Less Traveled

Change is hard. As an asset protection attorney, I see firsthand how difficult change can be, especially when it’s related to finances and investment decisions. Often, I see clients who hold bad investments in the real estate and stock markets with the hope of “getting out” as soon as they’re even.  It’s almost always the case that one of two things occurs:

  1. The investment doesn’t get back to even and the client is financially forced to exit at the worst possible moment, or
  2. The investment gets back to even, and the client’s psychology changes dramatically. Suddenly, it seems as though continue to hold the investment is somehow much less risky than it really is.

Psychological Choices: Examining Ups And Downs

Fundamental problems exist with both of the choices listed above. In the first scenario, one sacrifices time and the value of money over time (the “time value of money”), not to mention the capital loss when the investment is finally cashed in. In short, the opportunity cost is too high for the payoff.

The fallacy of the second scenario is that once you’re even, the investment could continue on its upward path and actually end up being a profitable investment. Realize (i) the investment has already made what is likely a significant move, and (ii) your psychological stance is changing from one of “I just want to be even” to a position that looks like greed.

The decision imbalance (the inability to make the right choice) is a result of the fact that psychologically losing feels worse than winning feels good. Think about it: If one was actually suffering the “pain” of a losing position when the investment came back to even, one would liquidate the investment immediately. No questions asked. There is a whole field of psychology called loss aversion that is dedicated to studying this phenomenon.

Almost all of us consciously seek to avoid pain (“if only I could get back to even”), but that only lasts until the pain is gone.  At the point when pain or losses disappear, we start looking for a new emotion. We start looking for the positive emotions associated with winning and profit. The problem is that one has to win and profit a lot in order to induce an emotional response on par with just a little bit of losing, so much so that it will be almost impossible to “win enough,” and you risk losing again before achieving your profit target.

Admitting When You’re Wrong

Sometimes, you just have to admit that you’ve been wrong, cut your losses, and move on to another investment. Some of the best minds on Wall Street have conditioned themselves not to be “married” to their investments. That’s because in the vast majority of cases, individuals don’t have control over their investments. If you’re holding a passive investment, something like real estate (in some cases where property is over leveraged) or stock on the publicly traded markets, you have to realize that you’re not in the driver’s seat, and hope is not a viable investment strategy.

Get comfortable with taking losses and moving on, and also get comfortable taking profits more quickly than usual. Again, understand that in the passive investment world of stocks and bonds, we have little control. We are psychologically programmed to do the “wrong things” when it comes to investment decisions, and ou have to win the battle with yourself before you can win with your investments.

If you’d like to talk about how strategic applies to wealth preservation and asset protection, please contact us today and visit us at https://mwpatton.com

Psychology

Asset Protection and Wage Garnishment

One question I encounter quite often is what happens to my earnings (i.e. wages) if a judgment is entered against me? It’s a great question, because even if the bulk of your assets are protected, income can still be intercepted . . . in some circumstances. I want to address Texas and Florida asset protection laws as they pertain to garnishment of wages, because I have a lot of clients in those two states.

Texas and Florida

A writ of garnishment is a legal remedy that courts (outside of Texas) grant to creditors allowing them to collect a certain portion of a debtor’s wages or other income in an effort to satisfy outstanding judgments. For example, if your wages are garnished, then your employer would actually be ordered by the court to convey a portion of your paycheck directly to your creditors. In short, garnishment can be a harsh remedy, and it can have devastating consequences for people who rely on their income to meet daily needs.

Texas law does not have a mechanism for garnishment. In short, creditors have no way to garnish or otherwise intercept wages or other types of income from debtors located in Texas.  It is possible that a creditor could attempt to intercept a federal tax refund, but that is a long shot in most circumstances.

Florida Asset Protection

Unlike Texas, Florida does allow courts to issue writs of  garnishment. This means that debtors (i.e. individuals with judgments against them) in Florida need to plan for the possibility that some of their income may be intercepted. Despite that possibility, Florida asset protection law does make one notable exemption to a creditor’s right to garnish wages. This exception is called the head of household exemption.

If you are the head of a household in Florida, then your wages are “off limits” and cannot be garnished.  In this context the term “head of household” is more of a family definition. In other words, it doesn’t relate to where one lives or with whom but, rather, refers to an individuas support obligations. One can be the head of a household so long as she or he has a legal or moral support obligation for another person such as child, spouse, or parent. The supported person does not necessarily need to live in the same house or reside with the head of household (e.g. many parents have primary financial support obligations for children even though they do not have primary custody of the children).

Federal Garnishment Limitations

In addition to Florida’s state laws that limit garnishment of wages, there are many federal limitations on the amount of wages that can be garnished. Federal law limits garnishment to the lesser of (i) 25% of an employees disposable earnings or (ii) the amount by which disposable earnings are greater than 30 times the national minimum wage. Disposable earnings are basically equal to take-home pay. So, if you’re a high income earner, garnishment can have teeth.

To some extent, asset protection planning can help with the issue of garnishment, especially the use of offshore trusts. But truthfully, the best plan of attack is to set up your business so that you can control your wages. That way you can lessen the severity and impact of wage garnishment on your life.

Asset Protection Articles

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Protection from Lawsuits Part I

Protection from LawsuitsIn this three part series, I’m going to analyze ways in which you can insulate your assets from the legal system.  Part I (this article) will discuss why it’s important to be “judgment proof.” Part II will delve into different types of assets that need protecting. Part III will bring everything together in terms of establishing a plan.

Protection from Lawsuits

What is the best way to discourage a plaintifs’ attorney who works on contingency fees? The most effective method is to make sure you’re overlooked by them. Not having any assets is one way to make sure that happens. In the legal community, people without any assets are called “judgment proof.” Being judgment proof is an excellent way to protect assets from lawsuits. Attorneys want to make the easy money. They don’t want to waste time pursuing defendants that will be unable to pay.

Remove the Contingency Fee, Remove the Incentive to Sue

Again, most plaintiffs’ attorneys work on contingency fees. You’ve seen those guys on T.V.: “We don’t get paid unless you collect!”

Personal injury and malpractice attorneys do not receive upfront retainers from clients. They don’t bill by the hour either. The only way these lawyers get paid is by winning or settling cases and collecting. If a plaintiff’s attorney loses a case, they get no compensation and are often “out” the expenses of litigation (e.g. court costs). The same thing happens if they win but can’t collect.

It’s obvious that personal injury and malpractice claims attorneys must evaluate several factors when deciding whether or not to take on a new case. First, they must determine the likelihood of establishing liability (i.e. winning the case). Second, they have to determine if the defendant will be able to pay.

The defendant’s ability to pay is a critical factor. If a potential defendant is judgment proof, then they are not considered an easy target.  As the saying goes, “If you’ve got nothing, you’ve got nothing to lose.”  Pursuing a course of litigation against a judgment proof defendant would be a waste time and money for most personal injury and malpractice attorneys. Even if liability can be established, there is no way to collect. If there is no way to collect, there is no way to get paid. It’s that simple.

It’s All About the Money

Plaintiff’s attorneys are in the game to make money. It would be an absolute anomaly to see a lawsuit filed against a business or individual that does not have assets and the ability to pay.

The takeaway is that being judgment proof provides an excellent form of lawsuit protection for your assets. It’s an easy way to deter litigation. How this applies to a person with significant assets will be discussed in the third part of this series.

If you’d like to learn more about asset protection planning, please call us today.

 

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Control of Assets Held in an Offshore Trust

One major concern surrounding the use of offshore trusts is the question of control. Who controls the assets held in an offshore trust? Giving one’s assets to a trustee who is expressly prevented from returning those assets is scary, to say the least. The rub is that control over the assets must be partially relinquished at some point (though not initially), or else a court might not honor the trust. This is not an abstract concern but, rather, one that has resulted in actual losses for actual clients of other firms in reported cases involving foreign asset protection trusts. So control over assets must be partially surrendered (after litigation is in motion) in order to gain the full benefits of an offshore protection trust, but clients are hesitant to surrender control. How can we solve this problem?

Enter the Cunning Asset Protection Attorney

If a settlor retains control of trust assets, a U.S. court could require the settlor to make a distribution to her or himself.  That distribution could then simply be paid over to creditors. That would be a nightmare. So asset protection attorneys devised an ingenious mechanism: The trust protector. In a broad sense, trustees “report” to trust protectors. Trust protectors have no control of the actual management of the trust or decision-making with respect to trust assets, but protectors can hire and fire trustees, veto certain actions (including unwanted distributions), and otherwise make sure that the trustee is managing the trust in a manner acceptable to you–the client.

One obvious problem still remains. If a trust protector is a U.S. resident subject to the jurisdiction of domestic courts, what is there to stop a judge from order the trust protector to replace a foreign trustee with a person subject to the court’s jurisdiction? The answer is “Nothing.”

There are a few ways that smart asset protection attorneys deal with this problem. The first is to appoint a trust protector who is not subject to the jurisdiction of U.S. courts. This can be a trusted friend or family member of the settlor (i.e. the trust creator). The second option is to give the trust protector only veto power over certain actions of the trustee. These are called “negative powers.” In other words, the trust documents can specify that the trust protector can “shoot down” affirmative actions of the trustee, even though the protector does not have the ability to replace a governing trustee. If a court then requires the trust protector to exercise it’s powers, those powers will be of limited use in repatriating offshore trust assets.

Using More Than One Trustee

Using multiple trustees is another option. In this scenario, some trustees can be domestic U.S. persons and at at least one such trustee must reside in the jurisdiction of the trust. If a lawsuit is filed, of course, the domestic trustees will be required to resign. Only at that point will the stigma of allowing a foreign trustee to control the settlor’s assets come into play. By that time, the foreign trustees (likely a very reputable institution) will have earned the settlor’s trust.

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