The Florida LLC as an Asset Protection Tool: Think Twice
We often hear from a client that they want us to form an LLC for them, because they read somewhere…usually on the internet…that it is the “ perfect asset protection tool”. As you will see, this is another example of how important it is to be believe nothing you hear and half of what you see.
Assuming you are already confronting a looming creditor problem, the moving of assets into ANY so-called asset protection device is at best a sketchy prospect. The fact that an LLC might serve as a proper tool in the proper context, will not protect you if you move your stuff into one under bad timing and with bad facts . What makes for good facts, good timing and appropriate devices for appropriate circumstances is the subject of an entire, complicated area of legal practice. You wouldn’t remove your own appendix using a youtube video as your guide. Proper asset protection planning is no different.
Here are 5 reasons why forming a Florida LLC to protect your assets may be a fool’s game:
- Florida law allows creditors to target the LLC as the recipient of a fraudulent transfer if the asset was moved within a specified time frame, and can be shown to have been done with the intent to keep the asset out of the creditors’ hands. If you move the asset to your LLC ..even with good intentions….the transfer can be undone if you did not receive adequate value in return…a concept known in the law as “consideration”. Most lawyers spend a year in law school learning the fine layers of “consideration”. You will not learn those nuances via google.
- Florida, unlike a few states, allows “foreclosure” of your interest in the LLC. A savvy lawyer can take away your position in a Florida LLC and hand it over to you adversary. Unlike Florida, “good” asset protection states have specific laws that preclude anything other than what is known as a “charging order”, or a lien on distributions from the LLC. With proper drafting, this creditor remedy in those states can be rendered almost useless.
- Simply forming an LLC and not understanding and observing legal formalities of administering the entity is like buying a beautiful lollipop, leaving on the wrapper, and wondering why you are not enjoying the licks. The true test of any asset protection device is not in the formation; it is in the drafting of the underlying operating documents. We have many provisions that we consider essential to making an entity a “sanctuary” , and their application depends on the needs and goals of the particular client.
- What if you have to file bankruptcy? Kiss your LLC interest goodbye. The trustee steps into your shoes and owns your interest. There may be structural planning that could avoid this, but again, be wary of that ad in the sports page next to the Viagra ad that invites you to “Form an LLC. Save your Assets”….trust me, that vendor has no bankruptcy law pedigree but will be quick to draw on your credit card.
- Florida is not a pro-debtor state. Why and so what? Florida’s adoption of the Revised Uniform Limited Liability Act is relatively recent, and it includes certain rights against LLC’s that other states do not have. Because the law is new, that means there is little case law interpreting it. And that means that the lawyer chasing you can ask the court to basically “wing it”….if the law doesn’t dictate an outcome, the court can invent one. This is different from the states that have had asset protection-based LLC laws for years; states where the courts have been time- tested and where there is law to read and understand and follow.
So if you think your panacea to your debt woes is a Florida LLC, you might want to save your money.
Having burst your bubble, did you know that in Florida you could be on the brink of financial ruin, move all your money into a specific place, send a letter to your creditors that says “hey, I’m hiding my assets from you.. .go pound salt”, and YOU WILL BE COMPLETELY SAFE FROM YOUR CREDITORS? Hint: that place is absolutely not an LLC. Make an appointment for an asset protection conference, mention this article, and we will give you a free copy of the Florida case law that gave birth to one of America’s greatest asset protection strategies.