South Florida Asset Protection Blog

Exemption of Keogh Plans in Florida

2010-01-15T09:12:00.000-08:00

The 11th Circuit Court of Appeals recently issued its opinion in the case of In re Baker, ___ F.3rd ___, 2009 WL 4912122 (11th Cir. 2009) in which it held that the involved Keogh plan did not have to comply with ERISA in order to be exempt under § 222.21 (2)(a)(1), Florida Statutes. The Court held that the Florida exemption statute only required that the Keogh plan qualify under section 401 (a) of the Internal Revenue Code (the "IRC") and did not require the further compliance with the provisions of ERISA.

Section 222.21 (2)(a)(1), Florida Statutes generally provides for the exemption of assets payable to or an interest of an owner, participant, or beneficiary in a "fund or account" that is maintained in accordance with a plan that has been preapproved by the IRS as exempt from taxation under section 401 (a), et seq. of the IRC. Section 401 (a) of the IRC provides for the exemption from taxation of certain retirement plans maintained for the benefits of "employees", which includes "a self-employed individual."

The lower courts had held that the Keogh plan was not exempt on a contention that it was not maintained in accordance with the ERISA provisions (29 U.S.C. sections 1001-1461) in addition to having been "preapproved by the Internal Revenue Service" as required by § 222.21(2)(a)(1), Florida Statutes. The lower courts rejected the debtor's argument that § 222.21 (2)(a)(1), Florida Statutes only required the Keogh plan to qualify under section 401 (a) of the Internal Revenue Code and did not require the additional complaince with ERISA. The lower courts based their decision on the case of Raymond B. Yates, M.D., P.C. Profit Sharing Plan v. Hendon, 541 U.S. 1, 124 S.Ct. 1330, 158 L.Ed.2d 40 (2004), which held that the sole shareholder and president of a professional corporation could qualify as a "participant" in an ERISA pension plan as long as the plan cover other employees other than himself or spouse.

The 11th Circuit Court of Appeals reversed the lower courts and held that § 222.21(2)(a)(1) only required the preapproval by the IRS under section 401(a) of the IRC and did not require the additional compliance with ERISA. The court stated that Fla. Stat. § 222.21(2)(b) specifically provides that for the fund to be exempt it need not necessarily be maintained in accordance with a "governing instrument that is covered by any part of [ERISA]...".

Homestead Held in Revocable Trust

2009-11-21T15:48:00.000-08:00

The bankruptcy case of In re Dumford, ___ B.R. ___ (Bankr. S.D.Fla. 2009) provides some warnings on filing for chapter 7 bankruptcy when one's "homestead" is held by in a revocable living trust. In this case, the debtor transferred her homestead into a revocable living trust and retained a "life estate." The debtor claimed her life estate in the home as an exempt homestead.

When the debtor filed for chapter 7 bankruptcy, the chapter 7 trustee objected to the exemption status of the homestead as it was owned by the trust and not a "natural person".

To complicate matters further, the debtor also died during the bankruptcy case. Due to the death, the chapter 7 trustee attempted to amend the living trust to make the bankruptcy estate the beneficiary of the revocable living trust. This was an attempt by the chapter 7 trustee to become the sole owner of the property.

Fortunately for heirs of the now-deceased debtor, the court refused to allow the trustee to amend the living trust as the trustee did not act until after the death of the debtor. The court held that the trust by its own terms could only amended while the debtor was living and competent.

The court's ruling though leaves open the possibility that a future trustee could amend the trust of a living debtor. This case gives much caution to the idea of filing for chapter 7 bankruptcy while one's "homestead" is held in this type of trust.

If one must file for bankruptcy relief when the "homestead" is held in such a trust, one may instead consider filing for chapter 13 relief where one generally does not face liquidation powers of a chapter 7 trustee.

Florida Domicile

2009-11-07T11:18:00.000-08:00

In Florida, domicile is generally regarded as the place where a person has a fixed abode with the present intention of making it his permanent home. One established, a domicile continues until it is superseded by a new one.

A person's intentions may be proved by his expressions of intent and by overt acts proving intent. Intent may be shown by ones testimony or that of another. Courts though tend to focus on nonsubjective evidence to infer intent such as the following:

executing a new will reciting Florida as the state of domicile
filing of a declaration of domicile with the clerk of court
obtaining of a Florida driver license
obtaining a Florida library card
registering to vote in Florida
owning a Florida residence and filing a Florida homestead exemption for the property
sale of residence in former state of domicile
ceasing employment in former state of domicile
activity in community in Florida
moving medical, dental, legal, and accounting relationships to Florida professionals

Homesteads Held in Trust

2009-10-10T15:12:00.000-07:00

The status of real property held in trust as homestead has been questioned in recent cases. Often a person will convey his homestead to a revocable trust of which he remains trustee and beneficiary.

Some courts uphold the claim of homestead status if the trust is freely revocable and the debtor is the sole beneficiary and thereby the grantor maintains a legal or equitable interest in the real estate. The courts note that the Florida Constitution does not distinguish the different types of ownership interests that may qualify for the homestead exemption.

Constructive Trusts in Florida

2009-10-09T10:18:00.000-07:00

A constructive trust is a remedy imposed by a court to return property to its rightful owner and to prevent unjust enrichment of one person at the expense of another. Equity holds that although the possessor holds "bare legal title" to the property, the beneficial interest is held by the person entitled to the property. The property may have been acquired by another by fraud or even without fraud if it is against equity that is should be retained by the person who holds it.

For the imposition of a constructive trust, there must be generally be clear and convincing evidence of

a promise, express or implied
a transfer of property and reliance thereon
a confidential relationship (legal, moral, social, domestic or personal)
unjust enrichment (by fraud or benefit of the mistake of another)

Totten Trusts in Florida

2009-10-09T10:02:00.000-07:00

A Totten trust is merely a tentative trust that is revocable at will until the depositor completes the gift during his lifetime by some unequivocal act or declaration or subsequently dies. Since the depositor has complete control over the funds during his lifetime, he is regarded as the owner of the account.

The Totten trust doctrine has been accepted in Florida. It has been held that the deposit by one person of his money in his own name as trustee for another is not a irrevocable trust during the lifetime of the depositor. "It is a tentative trust merely, revocable at will, until the depositor dies or completes the gift in his lifetime by some unequivocal act or declaration, such as delivery of the passbook or notice to the beneficiary." Where the depositor dies before the beneficiary without revocation, it is presumed that an absolute trust is created as to the balance on hand at the death of the depositor.

Totten trusts may be revoked. There are no specific formalities required to evidence the revocation of a Totten trust. Any decisive act or declaration of disaffirmance during the lifetime of the owner will generally suffice.

Exemption of Wages in Florida

2009-10-09T09:27:00.001-07:00

Florida statute 222.11 generally provides for certain exemptions of "disposable earnings" of a head of family and non-head of family in three different situations as follows:

All of the disposable earnings of a head of a family of $500.00 or less a week are exempt.
Disposable earnings of a head of family greater than $500.00 are exempt unless the person has agreed otherwise in writing (also cannot exceed 15 USC 1673)
Disposable earnings of a person that is not a head of family is exempt to the extent of 15 USC 1673

15 USC 1673 generally limits the amount that can be garnished to 25% of the individual's disposable earnings per week. Exempt earnings that are deposited into a bank are exempt for six months if the funds can be traced to and identified as earnings.

The determination of whether a person is the "head of family" is based on the totality of the circumstances.

"Earnings" is defined to include compensation paid in money for personal services or labor whether denominated as wages, salary, commission, or bonus. Disbursements from a family owned business may not constitute "earnings" unless there is a formal arms length employment agreement and if the disbursements are characterized as "profits." Commissions and bonuses may constitute earnings even if the person is labeled an independent contractor if his activities are essentially a job, he is supervised, and not in the nature of running a business. But commissions have been held not to constitute earnings if the person is free to make his own business decisions and solely responsible for expenses incurred in the operation of his business. A return on an equity investment is not earnings.

Lost wages have been held to consitute earnings where the settlement properly identified them as earnings.

According to the Federal Rules of Bankruptcy Procedure, the party objecting to exemptions has the burden to prove by a preponderance of the evidence that a debtor is not entitled to the claimed exemption. If the objecting party establishes prima facie evidence that the exemption should be denied, the burden shifts to the debtor to establish that the exemptions are legally valid.

Exemption of Workers' Compensation Benefits in Florida

2009-09-03T14:58:00.000-07:00

Florida Statutes section 440.02 provides for a certain exemption of worker's compensation claims in Florida. It generally provides for the exemption of "compensation or benefits due or payable" under chapter 440. The exemption though does not extend to creditors with claims based on an award of child support or alimony.

The Florida Supreme Court held in Broward v. Jacksonville Medical Center that "workers' compensation benefits received by the beneficiary and deposited in a bank account" remain exempt "so long as the funds are traceable to the workers' compensation benefits." Florida courts also hold that publicly traded stocks, bonds, and mutual funds purchased with worker's compensation benefits remain exempt.

The In re Mix case held that this exemption for worker's compensation benefits applies whether the benefits are payable to compensate for lost wages or for present or future medical expenses.

Florida Exemption of Life Insurance

2009-09-02T07:34:00.000-07:00

Florida Statutes provide for certain limited exemptions of life insurance.

Cash Surrender Value

Florida Statutes section 222.14 provides that the "cash surrender value" of life insurance "issued" upon the lives of citizens or resident of Florida is exempt from the claims of

creditors of the person whose life is so insured (some courts hold insured must also be the owner of policy)
creditors of the beneficiary

unless the policy was effected for the creditor's benefit.

Florida courts broadly construe the required nature of the "form" of the "cash surrender value" to include any cash value that may be obtained either by means of negotiation or pursuant to an agreement for surrendering the policy. One court held that this exemption applied to a certificate of deposit purchased with the cash surrender proceeds of the life insurance policy.

This statutory exemption is subject to disallowance if created by the conversion of non-exempt funds into exempt assets in contravention of Florida Statute sections 222.29 and 222.30.

Proceeds of Life Insurance - Exempt from Claims of Insured but Not Claims of Beneficiary

Florida Statutes section 222.13 provides for the exemption of the proceeds of life insurance from the creditors of the "insured" upon the death of a person residing in Florida. Courts hold that this statute provides for the exemption from the claims of creditors of the insured but not from the claims of the creditors of the beneficiary. This means that the proceeds are available to the claims of the beneficiary's creditors.

Bankruptcy Cap on Exemption of Homestead Acquired within 1,215 Days of Bankruptcy Does Not Apply to Tenants by the Entireties Exemption

2009-08-27T08:26:00.000-07:00

The new bankruptcy section 522(p) added in 2005 provides a cap of $136,875.00 in value (equity) on homestead property acquired within 1,215 days of the petition date.

Courts though have that this limitation only applies to the Florida homestead exemption that the debtor could claim under the Florida Constitution and not the separate exemption available for property held as tenants by the entireties.

One Court noted that while its ruling would appear to provide a way for a debtor to "end run" the $125,000 cap contained in section 522(p), that its ruling is consistent with the legislative history of new section 522(p) which was directed to close the "mansion loophole" and not against a state's common law exemption for tenancy by the entireties property.

Tenancy by the Entireties Exemption

2009-08-23T11:48:00.000-07:00

The Bankruptcy Code provides in section 522(b)(3)(B) in general for the exemption of property held as a tenant by the entirety or joint tenant to the extent that it is exempt from process under state law.

Property held in a tenancy by the entireties is generally exempt from the claim of individual creditors under Florida common law but is not exempt to the extent of joint debts of both spouses or to the extent of a fraudulent conveyance into the property. Havoco of America, Ltd. v. Hill, 197 F.3d 1135 (11th Cir. 1999).

Under Florida law, property held by a husband and wife as tenants by the entireties belongs to neither individual spouse, but to a separate entity referred to as the "unity" or "the marriage." Florida law recognizes that entireties estates can exist in both real and personal property. Property held as tenancy by the entireties generally possesses six characteristics: 1. unity of joint ownership and control (unity of possession), 2. unity of interest, 3. the interests must have originated in the same instrument (unity of title), 4. the interests must have commenced simultaneously (unity of time) 5. survivorship, and 6. the parties must be married at the time they took joint title (unity of marriage).

Florida law provides that real property held by a husband and wife in joint names is held in a tenancy by the entireties absent some express indication to the contrary. Beal Bank, SSB v. Almand and Associates, 780 So. 2d 45 (Fla. 2001). Florida law also provides a presumption that a bank account titled in the names of both spouses is held as a tenancy by the entireties as long as the unities of possession, interest, title, and time are met. Various court decisions extend the presumption in favor of a tenancy by the entireties to personal property in various manners. Some courts extend the presumption to all personal property.

The Court in In re Kossow, Case No. 03-27115-BKC-PGH (S.D. Fla. 2007)(Hyman, J.) allowed the tenancy by the entireties exemption of certain household furnishings acquired during the marriage as there was no evidence to rebut the presumption. The Court also allowed the tenancy by the entireties exemption of other household furnished acquired prior to the marriage as it found that it was subsequently assigned to the marriage. The Court further found the joint federal income tax refund as exempt tenancy by the entireties property.

The case of In re Schwarz, III, Case No. 06-13348-BKC-JKO (S.D. Fla. 2006)(Olson, J.) illustrates that a debtor may be able to exempt property held as tenants by the the entireties even though he is required to claim another state's exemptions and not able to utilize the Florida homestead exemption.

The Exemption of the IRA in Bankruptcy and the Loss Thereof by "Prohibited Transactions"

2009-08-22T12:36:00.000-07:00

The recent decision in the case of In re Willis, 07-11010-BKC-PGH (S.D Fla. 2007)(Hyman, J.) reviews the IRA exemption in bankruptcy or the unfotunate lack thereof due to "prohibited transactions."

Although the bankruptcy code generally provides for the exemption of IRAs in bankruptcy, this exemption may be lost if the bankruptcy court determines that the IRA has lost it tax exempt status by engaging in "prohibited transactions." The IRS's initial favorable determination of an IRA is as to its form and is different from a bankruptcy court's review of the conduct under the plan and the loss of tax exempt status.

The bankruptcy code provides in section 522(b)(3)(C) for the exemption of "retirement funds to the extent that those funds are in a fund or account that is exempt from taxation under section 401, 403, 408, 408A, 414, 457, or 501(a) of the Internal Revenue Code of 1986." The bankruptcy code also provides a rebuttable presumption that retirement funds are exempt if a favorable determination is received from the IRS. The bankruptcy code further sets forth a certain analysis if the retirement funds have not received a favorable IRS determination.

A bankruptcy trustee or creditor may attempt to rebut the presumption of exemption provided by the bankruptcy code for retirement funds that received a favorable determination by presenting evidence that the retirement fund was improperly operating under the applicable IRC provisions. In the In re Plunk decision, the Fifth Circuit Court of Appeals held that the bankruptcy court is permitted to reach an independent decision regarding a retirement plan's qualified status and is not bound by the IRS's previous determination. In re Plunk, 481 F.3d 302 (5th Cir. 2007). The Plunk court explained that there was no risk of conflicting decisions as the IRS's determination was only as to the retirement plan's structure while the court would be reviewing alleged misconduct that could disqualify the plan.

Section 408 of the IRC generally provides that IRA's are exempt from taxation unless "prohibited transactions" are engaged in by the owner or beneficiary of the IRA. If prohibited transactions are engaged in, the account ceases to be a qualified IRA as of the first day of the taxable year where a prohibited transaction is engaged in. Prohibited transactions includes a sale of property, the lending of money, and the transfer of income or assets by the plan to a "disqualified person" which is defined as a fiduciary of the plan such as any person who exercises authority or control over the plan.

Florida Exemptions

2008-05-08T20:43:00.000-07:00

Florida law provides certain defined exemptions for property in the following categories:

Homestead - unlimited in value, l/2 acre in municipality, 160 acres outside municipality, Art. X, Section 4, Florida Constitution

Personal Property - to extent of $1,000, Art. X, Section 4, Florida Constitution and a further $4,000 in certain circumstances

Earnings of Head of Family - section 222.11(2)(a), Fla. Stat.

Motor Vehicles - to extent of $1,000, section 222.25, Fla. Stat.

Health Aides Professionally Prescribed - section 222.25, Fla. Stat.

Proceeds of Life Insurance on Florida Resident - section 222.13(1), Fla. Stat.

Cash Surrender Value of Life Insurance on Life of Florida Resident - section 222.14

Annuity Contracts - section 222.14, Fla. Stat.

Disability Income Benefits - section 222.18, Fla. Stat.

Workers' Compensation Benefits - section 444.22, Fla. Stat.

Qualified Tuition Programs, Prepaid College Trust Funds - section 222.22(1), Fla. Stat.

Health or Medical Savings Accounts - section 222.22(2), Fla. Stat.

Educational IRA - section 222.22(3), Fla. Stat.

Property Held as Tenants by Entireties for debts of only one spouse

Florida Exemptions and "Fraudulent Asset Conversion"

2008-05-06T18:46:00.000-07:00

An "exemption" in Florida is a right or privilege provided by law to allow a person to retain certain property free from judicial seizure by his creditors. The purpose of exemption laws is to prevent a person from falling into destitution and to allow a person to maintain a means of earning a livelihood. Exemption law though are intended for the "honest debtor" so the law does not apply them to make them instruments of fraud on creditors.

Florida statutes section 222.29 provides that an exemption provided by chapter 222, which provides many of Florida's statutory exemptions, is not effective it is results from a fraudulent transfer or conveyance as provided in chapter 726 of Florida statutes.

Florida statutes section 222.30 provides for various avenues of relief for a creditor against a debtor who has made a "fraudulent asset conversion". A fraudulent asset conversion is generally any change or disposition of an asset so that proceeds of the asset become immune or exempt from claims of a person's creditors and the proceeds of the assets remain the person's property. The conversion is a fraudulent asset conversion as to a creditor whether the creditor's claim arose before or after the conversion if it was done with the intent to hinder, delay, or defraud the creditor.

In the event of a fraudulent asset conversion, a creditor may generally avoid the fraudulent asset conversion, obtain an attachment or other provisional remedy necessary to satisfy its claim, obtain an injunction against further conversion, or execute on the asset converted or its proceeds. against further conversion by the debtor of the asset or of other property. A cause of action for a fraudulent asset conversion must be brought within 4 years after the fraudulent asset conversion was made.

If an asset is converted into an exempt asset and the converted asset is subsequently transferred to another party, the provisions of chapter 726 apply to the transfer to the other party.

Annuity Contract Purchased to Effectuate Structured Settlement Held Exempt

2008-05-04T12:19:00.000-07:00

Florida statute §222.14 provides that the proceeds of annuity contracts issued to citizens or residents of Florida are exempt from a beneficiary’s creditors unless the annuity was effectuated for the benefit of the creditor. §222.14, Florida Statutes. In the case of Mc Collam v. LeCroy, 612 So. 2d 572 (1993), the Florida Supreme Court held that an annuity contract awarded to the debtor by a defendant to fund a structured settlement of a personal injury case was exempt. The creditor argued that the annuity contract did not qualify as an exempt annuity contract as being in substance a nonexempt structured settlement. The court noted that the statute does not define “annuity contracts” and hence it did not find the exemption limited to any particular types of annuity contracts, such as those based on the insurance of human lives.

The court in In re Dillon, 166 B.R. 766 (Bankr. S.D. Fla. 1994) illustrated the distinction between an exempt annuity contract purchased to fund a structured settlement and a mere structured settlement. In Dillon the judgment creditor agreed to make annual payments and did not purchase an annuity contract to effectuate the annual payments. The court held that the annual payments were not exempt proceeds of an “annuity contract” pursuant to §222.14, Florida Statutes.

Employee's Income from Running Own Business Not Exempt "Earnings"

2008-04-15T15:59:00.000-07:00

In the case of Brock v. Westport Recovery Corp., 832 So. 2d 209 (Fla. 4th DCA 2002), the court found that the judgment debtor’s income from his own family's corporate business did not constitute exempt “earnings” within the meaning of §222.11(1)(a), Florida Statutes (2001). The issue presented to the court was whether his income constituted “earnings” which the statute defines as including “compensation, paid or payable, in money of a sum certain, for personal services or labor whether denominated as wages, salary, commission, or bonus.” § 222.11 (1)(a), Florida Statutes (2001). The court stated that in order to determine whether monies derived from employment qualified as “earnings”, the “relevant inquiry is often whether a person’s employment is a salaried job or is in the nature of running a business.” Brock, 832 So. 2d at 210.

The court noted that the court in In re Manning, 163 B.R. 380 (Bankr. S.D. Fla. 1994) held that a debtor who owns or controls a business cannot exempt the funds he distributes to himself from the business simply by calling the money ‘wages.’” Id. at 382. In Manning, the debtor owned 100% of the stock in the corporation, he was the corporation’s president, he had no written employment contract, and he established his own salarly, commissions, and bonuses. The court held that the debtor’s income was not exempt “earnings” as the income constituted discretionary distributions from the family owned business. Although the debtor performed personal services, he did not receive regular compensation pursuant to the terms of an arms-length employment agreement. Id., See also In re Harrison, 216 B.R. 451, 454 (Bankr. S.D. Fla. 1997). The court also noted the case of In re Zamora, 187 B.R. 783 (Bankr. S.D. Fla. 1995) where the court concluded that an attorney’s compensation from his own law practice did not qualify as exempt “earnings” as the debtor’s activities were not essentially a job but were in the nature of running a business. Id. at 785.

The court held that the judgment debtor’s income did not constitute exempt "earnings". The debtor ran his own business, had control over the timing and the amount of his compensation, and did not have a formal employment agreement. The court noted that the legislature did not intend to exempt all funds a person “draws” from a business.

Although the judgment debtor’s income did not constitute exempt “earnings”, the court held that they were not reachable at least by a continuing writ of garnishment pursuant to §77.0305 as the income did not constitute a “salary” or “wages” as required by the statute. The court noted that “salary” or “wages” under §77.0305 falls within §222.11(1)(a)’s definition of “earnings”. A continuing writ of garnishment is not available to garnish draws, expense reimbursements, and capital account disbursement. See Cadle Co. v. G & G Assocs., 737 So. 2d 1136, 1140-41 (Fla. 4th DCA 1999).

W. Palm Beach, Boca Raton, and Miami Bankruptcy Lawyer

2007-08-27T08:58:00.000-07:00

W. Palm Beach Office - 1655 Palm Beach Lakes Blvd., Suite 630, W. Palm Beach, Florida (561) 434-5677

North Miami Office - 11645 Biscayne Blvd., Suite 208, Miami, Florida (305) 891-4055

Broward Telephone - (954) 424-6618Chapter 7 personal bankruptcy is generally used to discharge your dischargeable debt including credit cards, medical bills, and unsecured loans.

Chapter 13 bankruptcy is generally used to propose a plan to reorganize your financial affairs while under the protection of the Bankruptcy Court. Chapter 13 bankruptcy is often used to stop a mortgage foreclosure and to catch the payments up-to-date.

Chapter 11 bankruptcy is also used to reorganize your financial affairs while under the protection of the Bankruptcy Court. Chapter 11 can be used by individuals or corporations.

Jordan E. Bublick is a graduate of New York University School of Law (LL.M., 1984), Ohio State University College of Law (J.D., 1983), and Brandeis University (B.A., 1979). Jordan E. Bublick is a Board Certified Consumer Bankruptcy lawyer (ABC). The law firm was established in 1985. Practice is limited to bankruptcy law.

Practicing in Miami-Dade, Broward, and Palm Beach Counties, including W. Palm Beach, Boca Raton, Ft. Lauderdale, Coral Springs, Miramar, Pembroke Pines, and Plantation.