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Asset Protection in Florida: Five Common Mistakes – Five Tested Solutions

By Miami Asset Protection Attorney Phillip B. Rarick, Esq.

In our litigious society anyone can become a target of a plaintiff seeking to get a money judgment against you personally.   In today’s real estate market, where it is usually impossible to negotiate with the lender, deficiency judgments are a major concern.  You may have excellent car or property insurance, but a good personal injury attorney will typically seek to go beyond the insurance limits and name you as a defendant if the damages are substantial.    Owning assets that are exposed is an invitation to a lawsuit.

Thanks to the Internet, it is now easy for a creditor to find every piece of real estate that you own.   In fact, if you own real estate for commercial or investment purposes, you might as well publish your property holdings on the front page of the Miami Herald because it now takes minutes to find what property you own on the Internet.

Let’s examine Five Common Mistakes and Five Proven Solutions.

Mistake #1:  Failure to Establish or Maintain Corporate Records.         This failure is widely known by plaintiff’s attorney; at the inception of a suit they will usually ask to examine your corporate books.     Many – probably most – owners of small businesses fail to follow the fundamental steps to properly set up a company and then to at least annually update the corporate records.   Now is a good time for your due diligence review.  We will be happy to review your corporate records at no charge and advise you what, if anything, is needed to make sure that you have a valid corporate shield protecting you.

Mistake #2:    Thinking a Revocable Trust Protects Your Assets.           A living revocable trust is a fundamental estate planning tool that every person or family should have to take care of your family if you cannot, avoid probate upon death, avoid court intervention upon incapacity, and keep legal control within your family.   These are just some of the many advantages of a living trust.  However, a living revocable trust does NOT protect your assets.

Mistake #3:   Waiting Too Long To Begin Planning.    You should plan to protect your assets when “the waters are quiet” – before legal problems begin.   Asset protection planning integrated with your estate planning is the most effective, least expensive approach.

Mistake #4:  Fraudulent Transfers.   Some transfers to family members may not be protected, and often create more problems than they resolve.

Mistake #5:   Giving Up Control of Your Assets.  A seductive approach is to give someone else control of your assets – such as to family members.  See Mistake #4 above.  This is not a wise solution.  There are likely gift tax consequences – and you may lose control over your wealth.

SOLUTIONS.   Let’s now look at solutions to such mistakes.  Good asset protection planning will not make you judgment proof, but it will be extraordinarily difficult for any creditor to collect on that judgment.  Not having exposed assets is the best disincentive to a suit in the first place, or at least powerful leverage in negotiating a low settlement.

Note:   The solutions discussed here are not designed to protect you from IRS claims or to avoid U.S. income taxes.

Solution #1.     LLC: Florida Limited Liability Company.

LLC’s are one of the most popular planning tools for protecting your assets.  They are more flexible and more difficult to penetrate than S corporations.   Florida law gives creditors limited remedies against an LLC interest.  Assuming the LLC has a well drafted operating agreement – see Note below – a judgment creditor is limited to a charging order against LLC cash distributions.   If the LLC manager (you are usually the manger) decides not to make a distribution, the creditor stands on the sidelines and receives nothing.  On top of this, the creditor could be liable for taxes on the LLC interest even though the creditor receives no distributions.    These features make the LLC an effective asset planning tool if properly structured.  For more information about Florida LLC’s see: Beware of Single Member LLC’s.

Note:   Numerous companies offer to establish an LLC for you at $250 or less.  Avoid these schemes.  The “guts” of the LLC is a good asset protection operating agreement which must be drafted by a Florida attorney.   Anything less is false security.

Solution #2.    FLLLP:   Family Limited Liability Limited Partnership

A step up the asset protection ladder is a FLLLP: the technical name is a mouthful – family limited liability limited partnership.   The FLLLP is a powerful legal tool that offers multiple benefits, such as minimizing estate taxes and making gifts to children without giving them cash or any control.  However, another major benefit of the FLLLP is asset protection.  The FLLLP is often used as an umbrella or holding company over family entities, adding a second layer of protection that is extraordinarily difficult to penetrate for any would-be creditor.   For more information about the FLLLP, ask me to send you our paper called, “Benefits of the FLLLP”.

Solution #3.    IGT: Irrevocable Grantor Trust

The IGT is not a stand-alone solution to asset protection, but when used in conjunction with an LLC or FLP it is a way to protect assets for the benefit of your spouse, children, or grandchildren.    Under a properly drafted IGT, assets owned by the IGT are virtually unreachable by creditors.

Solution #4.    Nevis Island LLC.

An increasingly popular off-shore jurisdiction is Nevis Island, since it has enacted strong LLC laws similar to our Florida statute.  To attack an interest in a Nevis Island LLC, a creditor has to go to a Nevis court to get a charging lien.  It is unclear whether a Nevis Court would even recognize a Florida judgment:  Officials in Nevis have told one commentator they know of no instance where a U.S. creditor has obtained a charging lien in Nevis to enforce a U.S. judgment.

Using a Nevis LLC, you can retain control of your assets as the LLC manager.  You can invest anywhere in the world.  You can use a Nevis LLC to hold your U.S. bank accounts, or if you like, you can invest in a Swiss or London bank, or any bank in the world.

So where is this place?  Nevis Island is located southeast of the Virgin Islands.  It is part of the Federation of St. Kitts and Nevis.  It is an active member of the British Commonwealth and United Nations.  It has a stable democracy based upon British law.

Solution #5.    Cook Islands Trust

In 1984 the Cook Islands ushered in the modern asset protection era, and has remained the premier jurisdiction.  The highest quality of asset protection is probably a combination of a Nevis Island LLC and a Cook Islands Trust.     The Nevis Island LLC would have a pull-the- plug provision that would transfer assets to the Cook Islands.  Properly structured and administered, no court in the United States will have power to undo the plan.   The Cook Islands are a cluster of 15 islands located northeast of New Zealand.  They are a self-governing parliamentary democracy in free association with New Zealand.

Rarick, Beskin & Garcia Vega has been trusted by over 400 law firms and many families during the past 18 years for asset protection, estate planning, and trust cases.  To schedule an appointment, call (305) 556-5209 or email info@raricklaw.com.

Special Note

The information on this blog is of a general nature and is not intended to answer any individual’s legal questions. Do not rely on information presented herein to address your individual legal concerns. If you have a legal question about your individual facts and circumstances, you should consult an attorney that is experienced in Florida estate planning law. Your receipt of information from this website or blog does not create an attorney-client relationship and the legal privileges inherent therein.

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