Asset Protection Update: Report on Federal & Florida Developments

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Volume X, Number 2 – October / November 2001

© Donlevy-Rosen & Rosen, P.A.

INTRODUCTION.  This issue was scheduled to discuss certain qualified retirement plan protection techniques. Instead, we want to alert you to interesting recent developments.

apn10-2FEDERAL UPDATE. The new bankruptcy law, which, prior to September 11, was certain to have been enacted, is now defunct. In view of the anticipated increase in bankruptcy filings as a result of the widespread economic downturn, which was exacerbated by the recent tragedy, the new law, which would have made bankruptcy tougher on filers, no longer made sense. If the proposed new law had been enacted, the Texas and Florida (unlimited) homestead exemptions would have been limited in certain circumstances.

FLORIDA HOMESTEAD UPDATE.  Florida’s “sacred” homestead creditor exemption recently came under attack in Havoco of America, Ltd. v. Hill.In that case, a debtor acquired a Florida homestead using funds which were not previously exempt from creditor claims (if the funds had been exempt, there would have been no case). The debtor was found to have made the homestead purchase with the specific intent of hindering, delaying or defeating his creditors’ claims (a fraudulent transfer). Florida statutory law provides that where a debtor purchases an exempt asset with non-exempt funds with the intent to hinder, delay or defeat a creditor’s claim, the otherwise available exemption for the purchased asset will not be available (and the creditor would be able to reach the asset). The Florida Supreme Court held that a state statute cannot override the State Constitutionally granted homestead exemption, even where the specific fraudulent intent is found. The holding in this case is not a surprise in view of previous Supreme Court decisions.

TENANCY BY THE ENTIRETIES. Tenancy by the entireties (“TBE”) is a form of property ownership which can only exist between a husband and wife, and only in jurisdictions which recognize it. In those jurisdictions which recognize TBE in its traditional form, creditors of the husband or creditors of the wife cannot reach TBE assets.

Florida law has long recognized TBE ownership in its traditional form, and has long provided a legal presumption that real property acquired by a married couple, unless indicated to the contrary in the deed, is deemed to have been acquired as TBE property.

Until recently, however, the presumption was just the opposite where personal property (such as a bank or brokerage account) was acquired. On March 1st, 2001, the Florida Supreme Court, in the Beal Bank case, changed the law. The Court held that: (1) a presumption arose in favor of a tenancy by the entireties where a married couple acquired (opened) a joint bank account; (2) the presumption shifts the burden of proof to the creditor to prove by a preponderance of evidence that a tenancy by the entireties was not created, overruling Terrace Bank v. Brady, where the lower appellate court required the depositors claiming the TBE status to establish their intent to create tenancy by entireties by clear and convincing evidence; (3) if the signature card of a bank account does not expressly disclaim the tenancy by the entireties form of ownership, a rebuttable presumption arises that a bank account titled in the names of both spouses is held as a tenancy by the entireties as long as the account is established by husband and wife in accordance with the unities of possession, interest, title, and time and with right of survivorship; and (4) the debtors could prove a tenancy by the entireties by extrinsic evidence even if the bank did not allow that form of ownership.

This case creates a very strong presumption in favor of the existence of the TBE form of ownership in bank and brokerage accounts. Future cases will show whether this presumption will be extended to other forms of personal property.

IMPORTANT: What are the traps and pitfalls of this form of ownership? First, the protection is not available to the extent both spouse are indebted to the same creditor. Second, the limited protection which is available only lasts as long as both spouses are alive and married to each other. If one spouse has a judgment against him or her, and the other (non-indebted) spouse dies, the protection is abruptly ended, and the entire property becomes available to satisfy the creditor’s claim. Finally, holding a substantial amount of property as TBE is very poor estate planning, because only spouse’s estate tax unified credit will be utilized. In plain English, wasting a unified credit could mean an unnecessary increase in the couple’s federal estate tax liability of upwards of $300,000! Conclusion: TBE should be used as an asset protection technique only on a temporary basis, if at all, and with the recognition of the ephemeral and limited nature of the protection afforded.

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