The necessity for asset protection planning has never been stronger. It is evident that liability can arise from professional negligence such as a physician's medical malpractice or errors and omissions by accountants, engineers, architects, small business owners, the ownership of real property, known as "premises liability", tax or contractual obligations, as a result of the imposition of criminal or civil fine or penalty, divorce and other domestic relations disputes and in tort for negligent or intentional behavior. There also is a growing liability exposure for one who has done no wrong. These situations involve either strict liability or vicarious liability.  An experienced Florida asset protection attorney is critical to proper planning to avoid the loss of your assets to such liability claims, regardless of the validity of those claims.

No single asset protection planning technique can provide all the protection that an individual needs. No two individuals have the same factual circumstances, goals and objectives, risk tolerance levels, or asset composition. Each individual must look at the various alternatives that provide the level of protection that is available and that is compatible with their own circumstances and tolerance for complexity. In each case, tax considerations, both income and estate (and gift), must be considered before any action is taken. In every case where implementing an asset protection plan or technique is involved, careful analysis of the potential impact of the fraudulent transfer (sometimes referred to as the Fraudulent Conveyance Act) act is required.

Only after considering all economically feasible alternatives, and all of the advantages and disadvantages of each one, can an individual decide which course of action is most appropriate for that individual’s peculiar circumstances and needs.  An experienced Florida asset protection lawyer can help you develop a plan that will allow you maximum asset protection planning, and allow you to continue conducting yourself and your business enterprise as you have historically.

Many tools and strategies are available for the individual to consider. Some are relatively simple to plan and implement, such as the use of statutory exemptions and titling of property as tenancy by the entirety or as joint tenants with the right of survivorship.  Others are complex, such as family limited partnerships (FLPs) and domestic asset protection trusts (DAPTs). Some are more effective for a particular need, others are effective generally. Tools and strategies include the use of trusts, both domestic and offshore, proper drafting of estate planning documents, including wills, partnerships, and limited liability companies, statutory and Constitutional exemptions from creditors' claims, joint ownership of property, the use of entities such as a limited liability company (LLC), and the use of contractual liens.

In this section, we're going to discuss the use of trusts, general estate planning tools, and various legal entities such as family limited partnerships, limited liability companies and domestic asset protection trusts.  In other sections we will discuss exemptions from creditors' claims, the use of titling and ownership to protect assets, and the impact of the fraudulent conveyance statutes, including a Florida statute that prohibits "fraudulent conversions" of assets -- the conversion of assets that are not exempt from creditors' claims to assets that are exempt (such as annuities, life insurance or retirement plans). 

I.     Trusts

A.     Revocable Trusts

Revocable trusts typically do not provide asset protection against the grantor’s creditors during the grantor’s lifetime. Revocable trusts, in Florida, do not provide protection from creditors upon the death of the grantor. Upon the death of the grantor, assets titled in the grantor’s revocable trust are subject to the expenses of administration and the claims of the grantor’s creditors, to the extent that probate assets are insufficient to satisfy those claims.

B.     Irrevocable Trusts

Irrevocable trusts, for purposes of this discussion, come in two varieties: self- settled trusts and trusts created by third parties, known as third party trusts.

In general, just like outright gifts of property, transfers to irrevocable trusts, conceptually, place assets outside the reach of the grantor. Notwithstanding that general rule, a creditor can pursue the settled assets where (i) the trust is funded as a result of a fraudulent conveyance, (ii) the grantor retained too much control over the trust, (iii) the grantor retained too much of an interest in the trust, and (iv) the trust is illusory.

A creditor can reach a debtor’s interest in a spendthrift trust, or one of the variations of it, when the trust was created and funded by the debtor (a self-settled trust). The general rule in these cases is that where a person creates for his own benefit a trust for support or a discretionary trust, his creditors can reach the maximum amount which the trustee, under the terms of the trust, could pay to, or apply for the benefit of the grantor.

An individual may be able to create a trust that is asset protected, in whole or in part, of which such individual is a permissible beneficiary, by restricting the discretionary authority of the trustee with respect to such individual. Such restrictions include: (i) limiting distribution to the trust grantor to an ascertainable standard (e.g., health, education, maintenance and support); (ii) requiring that distribution to the individual not hamper the ability of the trustee to provide for the support of other beneficiaries such as the spouse or children of the individual; and (iii) requiring that the trustee first obtain the consent of adverse beneficiaries prior to distributing funds to the grantor. The greater the restrictions, the less likely it is that the trust assets will be available to creditors of the grantor. Obviously, these provisions limit the grantor’s access to the assets owned by the trust.

'width' is a duplicate attribute name. Line 1, position 37.C.     Domestic Self-Settled Asset Protection Trusts.

In 1997, Alaska and Delaware enacted new laws which purport to provide beneficial asset protection opportunities. The state of Nevada added its self-settled asset protection trust legislation in 1999. While varying to some degree from each other, both statutes are designed to allow a grantor to establish a trust that is not subject to his creditors claims, but allows the grantor to receive distributions from the trust as a beneficiary. After those two states enacted such legislation, other states have followed.  Now South Dakota, Wyoming and Idaho, and Tennessee have authorized the use of domestic self-settled asset protection trust by statute.

The degree of effectiveness of these statutes remains to be tested. For instance, the Delaware statute allows the grantor of a self-settled trust to retain the right to receive current income, thereby providing greater flexibility to the grantor. Such a right, if retained, could be reached by a grantor’s creditors in a Florida court.  Before you rely on the protection of a domestic asset protection trusts you should consult with an experienced Florida asset protection attorney to determine whether such a trust is appropriate for your circumstances.

The Nevada statute allows the grantor of a self-settled trust to retain only a discretionary distribution right. Based on Florida precedent, the creditors of a Florida grantor with a Nevada asset protection trust can only reach the rights retained by the grantor – a discretionary distribution right. A creditor’s right to reach a grantor’s retained interest in a spendthrift trust, under Florida law, could be analogized by Florida courts to a charging order imposed against a partner’s interest in a partnership. A creditor’s right to a debtor’s discretionary distributions from a trust is similar to a charging order because, absent a fraudulent conveyance, and under the holding of Brown, the court can not order the trust to make a distribution to the grantor, and the creditor cannot attach the asset owned by the trust because the creditor must respect the terms of the trust.

From an asset protection perspective, a domestic asset protection trust may be more advantageous than a family limited partnership because a trustee generally has greater discretion in the timing and amounts of distributions to beneficiaries than a general partner in a partnership with multiple partners. In addition, the trustee often has greater latitude in purchasing non-business, not-income producing assets to be used by the beneficiaries (e.g., a condominium at Vail) than does a general partner of a partnership.

Many foreign offshore trusts permit the settler to direct the disposition of the trust assets pursuant to a general or special power of appointment to ensure that the transfer of assets to the trust is an incomplete gift and included in the grantor’s estate to avoid income tax under IRC §684. With a domestic asset protection trust, the grantor is not subjected to income tax under IRC §684 and need not retain a general or special power of appointment, which would subject the principal and income of the trust to the grantor’s creditors claims under Florida law. This line of attack is therefore effectively cut off with domestic asset protection trusts.

There are four common arguments attacking the effectiveness of the domestic asset protection trusts. They are (1) conflicts of laws arguments; (2) the full faith and credit clause of the U.S. Constitution; (3) the supremacy clause of the U.S. Constitution; and (4) the fraudulent transfer laws. The arguments in favor of the sustainability of the domestic asset protection trusts are strong in each of the four positions.

Additionally, clients may prefer domestic asset protection trusts compared to offshore asset protection trusts for a number of reasons. U.S. courts are more likely to recognize a domestic trust rather than one in a faraway jurisdiction. Clients may want the security and financial strength of a trust created under the laws of Delaware or Nevada and maintained by a trust company located within the U.S. A domestic asset protection trust avoids the special tax reporting rules of a foreign trust. And, a domestic asset protection trust avoids the potential adverse federal income tax consequences associated with the ownership of asset by a foreign trust.

The principal risks in using domestic asset protection trust are that the legislation is still relatively new and the laws have not been fully tested in courts. Based upon an analysis of creditor rights, this risk may be acceptable to clients. Domestic asset protection trusts are a viable estate and asset protection alternative, and may become the predominant trust form in the future.  If you think a domestic asset protection trust may be of interest to you, you should contact a Florida asset protection trust lawyer with The Coleman Law Firm for a consultation to determine how a domestic asset protectioin trust may fit into your overall estate planning and asset protection planning needs.

'width' is a duplicate attribute name. Line 1, position 37.D.     Irrevocable Trusts – Created by Third Parties

It is well settled law that if a spendthrift trust is created by a grantor for another person’s benefit, either pursuant to the language of the trust itself or pursuant to the application of local law, the trust estate generally will not be available to the creditors of either the grantor or the beneficiary. A “spendthrift trust” is defined as a trust imposing, by its own terms or by statute, a valid restraint on voluntary or involuntary transfer of the interest by the beneficiary. A creditor can reach a debtor’s beneficial interest in a spendthrift trust, created by someone other than the debtor, only when the debtor can exercise dominion over the trust property.

The Florida Supreme Court has held that disbursements from spendthrift trusts can be garnished for alimony, incidental awards of attorney’s fees, and child support, before such disbursements reach the beneficiary debtor.  As is the usual case, the Internal Revenue Service may satisfy a tax claim against a beneficiary of a spendthrift trust.

        E.     Planning Considerations.

The creation of an irrevocable trust with asset protection and estate planning objectives funded with carefully selected assets can create significant asset protection benefits and tax savings as well.

Practitioners should generally avoid making the individual who is the subject of the asset protection planning a trustee of a trust, regardless of whether the individual created the trust or whether the trust was created for such individual by another party. Florida asset protection lawyers should recommend to their clients that spouses and parents of doctors, lawyers, architects, accountants or other professionals and persons with personal guarantees or other potential creditor exposure consider leaving their inheritances in spendthrift or discretionary trusts. This strategy provides estate tax, income tax, and asset protection benefits that are not available with outright devises. Generation skipping tax planning can be utilized in such a strategy as well.

In restructuring the estate plans of spouses and parents of a person considering asset protection, crummy powers should generally be avoided. The lapse of a crummy power arguably creates a grantor trust and, at least to such extent may be reachable by creditors. In addition, bankruptcy trustees have the authority to exercise crummy powers, which increases the need to provide flexibility in irrevocable crummy trusts to enable the grantor to specify whether future gifts to the trust are subject to a crummy power.

With regard to planning for expectancies from other family members, Bankruptcy Code §541(a)(5) provides that property received by the bankruptcy debtor, within one hundred eighty (180) days after filing a bankruptcy petition, by bequest, devise or inheritance, through a property settlement arrangement incident to a divorce or through beneficiary designation on an insurance policy or a retirement plan, become a part of the bankruptcy estate.

F.     Insurance Trusts and Partnerships

Typically, life insurance trusts are irrevocable so that the proceeds can be removed from the grantor’s estate for estate tax purposes. Assuming the proper spendthrift language is placed in the trust, the proceeds will be protected from both the grantor’s creditors and the beneficiary’s creditors.

Partnerships and limited liability companies used to own life insurance pursuant to a buy-sell agreement or other purpose, are entitled to the charging order protection that is discussed in more detail below.

G.     Children’s Trusts

With the help of a qualified Florida trust lawyer, using irrevocable trusts established for the benefit of children can be an effective method of transferring ownership of assets that can avoid future creditor claims. The grantor of such a trust should not retain any rights as trustee, or of reversion. A spouse or other family member, or unrelated third party, should serve in the capacity of trustee.

A similar result is achieved using Education IRAs, and Sec. 529 plan, where the owner/transferor transfers a complete interest in the property used to fund the plan, and does not retain control over the account.

The primary concern in making such transfers is to assure that there is no violation of the fraudulent transfer laws.

II.     Family Transfers

Generally, property held in the sole name of a debtor’s spouse is not subject to the claims of the debtor’s creditors when the debtor’s spouse is not also liable with respect to the debt in question. If an individual is solvent at the time of a transfer, and he is not under any imminent risk of actions by creditors or actual bankruptcy, a transfer of assets to the individual’s spouse will generally place such assets beyond the reach of the possible future creditors of the individual, particularly in light of the multitude of non- asset protection reasons for effectuating such transfers (e.g., estate planning, spousal support, etc.).

Among the numerous motivations for transferring assts to one’s spouse, other than asset protection, include allowing a spouse to take advantage of the $3.5 million Unified Credit Equivalence and otherwise equalizing the estate of each spouse. In addition, transfers of low basis assets to a spouse who may be ill can be beneficial if the transferee spouse passes away more than one year after the transfer, because the surviving spouse could benefit from a stepped up basis for income tax purposes upon death of the transferee spouse. The assets could be transferred back to the transferor spouse in trust where they may possibly be out of reach of the transferor’s creditors. The one year survivorship requirement under IRC §1014(c)may have only limited application to a transfer that is reacquired by a trust for the donor rather than by the donor directly.

An outright transfer of assets to one’s spouse will be free of transfer taxes due to the unlimited marital deduction provided by IRC §2523. However, if the spouse is not a U.S. citizen, the marital deduction is generally not available and the transfer must generally be structured to fall within the $110,000 per year annual exclusion for non-citizen spouses provided by IRC §§2253(i)(2) and 2503(b) as adjusted for inflation by the cost of living adjustment under IRC § 1 (f)(3).

Assets transferred to the spouse in trust provide certain asset protection for the transferee spouse. Assets, when transferred to a spouse in trust, generally take the form of a qualified terminable interest property trust (QTIP). IRC §2523(f) sets forth the lifetime QTIP counterpart to IRC §2056(b)(7), which provides an estate tax marital deduction for a testamentary QTIP. The lifetime election is made on a gift tax return for the year in which the QTIP transfer occurs. By definition, a QTIP trust requires spendthrift language in the instrument. Moreover, all the income must be paid currently to the donee spouse. For this reason and for other reasons discussed above, it generally would not be advisable to provide the transferor spouse with any beneficial interest in a trust established for the transferee spouse. The transferee spouse can be granted a testamentary special power of appointment which can be exercised by the transferee spouse to create a spendthrift trust for the transferor spouse. (See PLR 9140069 and PLR 9309023). This plan can create significant estate and asset protection benefits.  An experienced trust lawyer can help you make the right decisions regarding the use of a QTIP trust and its afternath.

Care must be taken that the assets transferred to the spouse are not transferred back to the transferor spouse outright upon the transferee’s death. The estate plan of the transferee spouse must be modified accordingly. If assets are to revert to the transferor spouse, they should generally do so in the form of a trust that contains spendthrift language. Generally, however, it would be better to have the assets distributed to the children upon the transferee spouse’s death as discussed above. In either case, if assets are transferred to the transferee spouse in trust, such trust should generally provide a limited testamentary power of appointment to the transferee spouse which will allow appointment of the property upon the death of the transferee spouse to or among a group of individuals which include the transferor spouse and the children of the couple possibly to qualified charities. Such a limited testamentary power of appointment is important because creditors of the transferee spouse may otherwise be able to reach the assets over which the spouse holds a general power of appointment.

III.     Will Drafting

When drafting wills, special care should be taken to provide the protections that can be afforded through the utilization of testamentary spendthrift trusts, as discussed above. Beneficiary designations and the form of ownership will dictate what assets are available to fund such trusts, so a careful review of those issues is necessary to assure fulfillment of the plan that is established in the will.

In Florida, particular attention must be given to the elective share statute, which now applies to the “augmented estate.” The augmented estate includes the deceased share of jointly owned property, property subject to beneficiary designations, and property owned through a revocable living trust. The failure to appropriately consider the potential impact of the elective share could result in substantial exposure of assets to creditors of one or more of the beneficiaries of an estate.  An experienced probate attorney or trust administration lawyer is important to have assist you anytime the issue of the Florida "elective share statute" is involved in a Florida probate or a Florida trust administration.

'width' is a duplicate attribute name. Line 1, position 37.IV.     Partnerships

The family limited partnership is perhaps without peer in the asset protection area. In addition to the typical benefits provided by a family limited partnership (“FLP”) for income and estate tax purposes (e.g. shifting income to family members in lower brackets, creation of fractional discounts, maintaining control and management and simplifying annual exclusion and other gifting) a major benefit of a family limited partnership is that if a family member is unable to satisfy a creditor, that creditor’s only remedy may be to receive a “charging order” against that family member’s partnership interest. Unless there has been a fraudulent transfer to the partnership, the creditor can not reach the partnership’s assets.

One of the primary reasons for the use of family limited partnerships as an asset protection technique is that creditors of an individual partner in the partnership cannot attach or levy upon the property of the partnership, unless the partnership also happens to be liable on the obligation in questions. The creditor is limited to obtaining a “charging order” against the debtor-partner’s interest in the partnership.

A charging order obtained by a judgment creditor against the judgment debtor’s limited partnership interest only entitles the creditor to the rights of an “assignee” of the partnership interest; namely to share in the profits and surplus of the partnership, not to exercise the rights or powers of a partner.  A judgment creditor, can get only a charging order under the Florida Revised Uniform Limited Partnership Act, and can not foreclose on the partnership interest itself. A creditor who obtains a perfected security interest in the debtor’s limited partnership interest has priority over a later judgment creditor who seeks to obtain a charging order over the limited partnership interest.

It is generally believed that a judgment creditor who exercises the right to a charging order must pay income taxes on the profits and income attributable to the partnership interest, even if no income is distributed by the partnership, based on Rev. Rul. 77-137, 1977-1 C.B. 178. At the same time, it may be possible for the general partner of a family limited partnership to delay distributions to the partners and also take a reasonable salary for its services, thereby leaving the creditor with the charging order with “phantom income” on which the creditor must pay the income taxes. Thus, it is possible for a creditor with a charging order to have a quite undesirable asset.

The proper establishment and maintenance of a family limited partnership can provide substantial estate and gift tax savings. An experienced estate planning or small business lawyer can help you be ensured that all appropriate actions have been taken to properly establish and maintain the partnership and other entities involved.  Proper maintenance of a FLP can be achieved by following this checklist and should provide some assurance of securing both tax benefits and asset protection benefits for those utilizing the FLP as a planning tool:

1) Ensure that a separate account is established and continuously maintained in the name of the FLP and the corporation, and that the asset in such accounts remain separate from nonentity accounts (such as personal or trust accounts), and from the account(s) of the name of the other entity.

2) The president of the corporation, the general partner of the FLP, should endorse all transactions involving the FLP; the president of the corporation should endorse all transactions involving the corporate general partner.

3) Establish and maintain a separate capital account for each partner of the FLP. Consult an accountant to establish and maintain such accounts.

4) Conduct annual meetings on behalf of the corporation pursuant to its bylaws to elect corporate officers and discuss corporate transactions. Such annual meetings should be documented in corporate minutes prepared and signed by the corporation’s secretary.

5) Maintain accurate records of FLP transactions as they occur and prepare an annual account of all FLP transactions for the given year to be maintained with FLP records.

6) Engage an accountant to prepare the appropriate tax returns for the FLP (Form 1065) and the corporation (Form 1120-S, assuming an S-election is made). Although the entities are treated as “flow through entities,” these returns are informational type returns that are required to be filed accurately and timely.

7) Ensure distributions from the FLP are made to the partners in accordance with their respective partnership percentages. Additions to the partnership should be made by the partners in accordance with their respective partnership percentages at the time of the addition.

8) Ensure personal obligations and expenses incurred by shareholders and/or partners are satisfied from such shareholders’ or partners’ personal nonentity accounts, never from entity accounts.

9) Ensure each entity remains active in its state of formation. Such active status should be maintained by payment of registered agent fees and satisfaction of any state tax requirements (i.e., payment of franchise tax, filing of annual reports, etc.) on a timely basis.

10) If the FLP agreement requires, ensure the corporation (as general partner) provides the appropriate FLP financial information to the limited partners, such as a balance sheet for the FLP, profit and loss statement for the FLP, federal and state tax returns, etc., as may be reasonably necessary for the limited partners to be advised of the financial status and results of operations of the FLP.

11) Limited partners may have reduced decision-making capacity with regard to the FLP; however, they are generally entitled to be apprised of the operations and maintenance of the FLP. Partners of the FLP and shareholders of the corporation should be advised to retain a portion of their assets outside of the FLP (i.e., in their revocable trusts and/or individual accounts). Such isolated assets should be used for their daily maintenance, expenses, gift giving, etc.

12) Ensure the FLP and the corporation are respected as true business entities. If the FLP and/or corporation engage in business transactions, all parties (family members included) to such transactions are required to abide by the appropriate transaction terms as evidenced in contracts, notes, etc. For example, payments of interest and/or principal on a note should be paid when due and, if not so paid, the appropriate interest and/or penalties should be calculated and collected.

A.     Limited Liability Partnerships

There were significant changes that positively impact asset protection planning that were made to the Florida Revised Uniform Limited Partnership Act (Chapter 620.101) and to the Revised Uniform Partnership Act (Chapter 620.81001) in 1999.

'width' is a duplicate attribute name. Line 1, position 37.B.     General Partnerships

Fla. Stat., 620.9001, provides that a general partnership may become a limited liability partnership by obtaining a required vote of the partners, and then filing a statement of qualification with the Department of State. A limited liability partnership is defined as “a registered limited liability partnership registered under §§620.78-620.789 . . . that has filed a statement of qualification under §620.9001 and has not filed a similar statement in any other jurisdiction.” This means that a partner in a general partnership can take advantage of the protection of a limited liability partnership once approved by the other partners and the statement is filed with the Secretary of State. An obligation incurred as a limited liability partnership is solely the obligation of the partnership. Fla. Stat., §620.8306. A partner will not be held personally liable, directly or indirectly, by way of contribution, for such an obligation solely by reason of being or acting as a partner. A judgment creditor of a partnership may perfect a judgment lien but may not proceed against the assets of a partner to satisfy a judgment arising from a partnership obligation, unless the partner is personally liable pursuant to Fla. Stat., §620.8306.

C.     Limited Liability Limited Partnerships

Fla. Stat. §620.187, provides rules for a limited liability limited partnership. In a limited liability limited partnership, both general and limited partners are protected from liability and will not be held personally liable for an obligation of the partnership. Fla.Stat. §620.8307.

'width' is a duplicate attribute name. Line 1, position 37.D.     Limited Liability Companies

Florida Statutes, Chapter 608, governs limited liability companies in Florida. Neither members nor managers of an LLC are liable, by reason of being a member or serving as a manger, under a judgment, decree, or order for a debt, obligation or liability of the limited liability company. The managers and members are also not liable to the limited liability company or to any other member or manager for the member’s or manager’s good faith reliance on the provisions of the limited liability company’s articles of organization or operating agreement. Any judgment creditor of a member of an LLC is limited to a charging lien and is typically not allowed any ownership interest in the member’s interest in a limited liability company. Pursuant to Fla. Stat. 608.433(4), a judgment creditor’s rights are limited only to an assignment of such an interest in the limited liability company, just as in the case with a partnership. The assignment of an interest in the limited liability company is subject to member approval. An assignee can participate in the member’s share of profits and losses, receive such distributions as are made to the member attributable to his ownership interest, and receive such allocation of income, gain, loss, deduction, or credit to which the assignor might be entitled. However, the assignee cannot exercise any rights or power of a member unless the assignee actually becomes a member. By the unanimous consent of all LLC members, unless otherwise provided in the operating agreement or articles of organization, an assignee can become a member of the limited liability company.

The Florida appellate courts have yet to consider the issue of whether a charging order is the exclusive remedy against a debtor’s membership interest in a limited liability company. As discussed above, Florida’s courts have ruled that the charging order is the exclusive remedy for an ownership interest in a partnership or limited partnership in Florida. The language of the statutes are virtually identical, and therefore it is reasonable to believe that the charging order will be determined by the courts, when presented with the issue, will be the exclusive remedy allowed for creditors of an LLC member with respect to the member’s ownership interest in the LLC. Accordingly, all of the asset protection features of a partnership or limited partnership should be accorded to the limited liability company in Florida.

One exception the Florida courts may carve out of the general rule is a single member LLC. At least one federal bankruptcy court that has considered the issue has determined that for a single member LLC, the creditor is not limited to a charging order, but can obtain access to the ownership interest itself, and ultimately to the assets owned by the LLC. Accordingly, if there is an intent to establish a single member LLC for purposes of simplicity in operations and to be considered a “disregarded entity” for income tax purposes, consideration should be given to holding the ownership interest as tenants by the entireties between husband and wife to afford asset protection from the creditors of either spouse.

E.     Planning Considerations

There is virtually no reason, other than the potential desire for a public offering of the stock of a corporation, for any small business operation to use the corporate form of doing business any longer. The use of a limited liability company, electing to be taxed as an “S” corporation, provides substantial asset protection over ownership of corporate stock, and provides all of the advantages of a corporate form of doing business.

However, there are circumstances where the client may be disadvantaged by electing S status, where the use of a limited liability company will prove beneficial. Where it is expected that the business operation will incur substantial debt, or have significant operating losses, or will be acquiring highly appreciating assets, then an electing partnership tax treatment provides substantial asset protection, and significant income tax advantages.

Though there is no case law in Florida presently, it appears fairly certain that a single member LLC will not receive the charging order protections that a multimember LLC receives. Accordingly, if the simplicity of the single member LLC is desired, the ownership of the LLC should be titled in both spouse’s names as tenants by the entireties, to obtain protection against any individual creditors of either spouse.

The use of an LLC also avoids a new and serious problem faced by many C corporations (particularly professional and other personal service corporations) as a result of the case Pediatric Surgical Assoc., P.C. v. Comm’r, T.C. Memo. 2001-81. Pediatric held that profits derived from associate physicians in a medical practice are corporate profits and can only be distributed to shareholder physicians of the C corporation as dividends, thus imposing two layers of tax on the profits generated by the associates.

In light of Pediatric, it is important to address those professional and other personal service businesses operating as C corporations, which have assumed that they could successfully avoid double taxation by utilizing the strategy of “bonusing” sufficient amounts of compensation to physician shareholder-employees until the corporation’s income is reduced to zero. Until now, this strategy enabled the personal service C corporation to avoid double taxation. Pediatric, however, has rendered this strategy unsound for many personal service corporations typically used by physicians and other professionals.

For those business entities that wish to convert to an LLC, the complexity and tax impact of that conversion will depend on the current form of doing business. For a corporation that is currently taxed pursuant to an “S” election, the procedure is quite simple. IRC regulations provided that an LLC that has elected to be taxed as an S corporation can acquire and own an S corporation, and be treated for tax purposes as a single entity. Accordingly, simply establishing a new LLC electing to be taxed as an “S” corporation, capitalized with the stock of the existing S corporation, will result in an LLC “holding company” and wholly owned subsidiary that will be treated as a single entity. The result is that the existing business entity continues to operate as it has, but after the completion of the conversion, the owners have greater protection from their personal creditors than they had before the conversion.

With respect to C corporations, the procedure is not so simple, but the income tax impact should be analyzed from a cost/benefit perspective to determine whether the asset protection features of the LLC outweigh the cost of the conversion.

 

 

The Jacksonville, Florida estate planning and asset protection lawyers and attorneys with the Coleman Law Firm offer their services as estate planning, probate, elder law, Medicaid planning, asset protection and guardianship lawyers and attorneys primarily in Northeast Florida including the following counties, towns, and cities:  Duval County - Jacksonville, Jacksonville Beach, Atlantic Beach, Neptune Beach; St. Johns County - St. Augustine, Ponte Vedra Beach, Nocatee, St. Augustine Beach; Clay County - Orange Park, Middleburg, Green Cove Springs; Nassau County - Amelia Island, Fernandina Beach, Yulee, Callahan; Flagler County - Flagler Beach, Palm Coast, Beverly Beach, Bunnell; Baker County - Macclenney, Glen St. Mary; Putnam County - Palatka, Interlachen; Columbia County - Lake City, Fort White; and in other parts of Florida as requested or necessary.  We are a participating attorney in the AARP Legal Services Network.