By: Robert B. Wolfe, CFP®
Depending on the state of one’s legal residence, the strategies and techniques for asset protection can vary. As an example, for those living in the State of Florida, the tools at the disposal of individuals are broad and sharp. Florida is so attractive of a place for defensive planning, that it is quite common for individuals across the country to move much of their estates to the Sunshine State. Although not backed by medical evidence, one might even argue that creditor protection planning in Florida is an even larger attraction than the steady supply of vitamin D beamed from above.
The tools for proper creditor and asset protection span many dimensions. They include proper titling of physical assets to structuring investments in the most secure way, such as in annuities or trusts. What follows is a list of the top five considerations for anyone trying to protect that which they have already earned. Although this list uses the protections of Florida as an example, some of which are exclusive to the State of Florida, many of the other techniques apply in other states, as well.
- In the State of Florida, an individual can protect 100% of the value of their primary residence from creditors, under Article X, Section 4 of the Florida Constitution, also known as the homestead exemption. This benefit is effective immediately upon the purchase of a home if the individual is a Florida resident, and if they have the intent to use it as their primary residence. To more formally define the property as their main household, a “declaration of domicile” can be filed with the courts. Still, if an individual also wishes to enjoy the tax assessment benefits, the homeowner must file with their local county property appraiser’s office.
- “Tenants by the entirety,” in contrast to, “joint ownership with rights of survivorship,” can provide exceptional asset protection. What ‘tenants by the entirety’ means is that a given property is owned by a married couple, who also satisfy the following requirements, among others: hold identical interest in the property; the interest commenced simultaneously, and the couple was married at the time of acquisition.
PRACTICE AND COMPANY PROTECTION
- Typically, physicians or other business owners will structure their practices and companies in the form of either an S, or in some cases, C Corporation. If the group owns many assets, including the building and equipment, it may be prudent to also create a separate LLC that owns the physical assets.
- An incorporation structure worth considering for the overall business is an LLC. With further counsel from an attorney, certain practices and businesses may decide that the protection granted from this particular classification makes sense. The two primary benefits include two primary protections: (1) the LLC protecting its members from liability generated by its property, and, (2) that the assets owned by the LLC are protected from liability arising from any individual member.
MEDICAL SAVINGS ACCOUNTS AND COLLEGE FUNDING
- The cash value associated with life Insurance policies, annuities, and any other policy is protected.
- Disability income benefits, “under any policy or contract of life, health, accident, or other insurance of whatever form, shall not be liable…in favor of any creditors” as taken from Statute 222.18 of the Florida State Legislature.
QUALIFIED RETIREMENT PLANS
- With respect to retirement, the term, “qualified,” is often used to characterize the types of retirement accounts that are exempt from upfront taxation, which is then deferred until you retire. In Florida, these retirement funding structures are also exempt from the claims of creditors.
- Examples of retirement plans that are afforded this protection include: IRA’s, pension plans, 401k’s, 403b’s, and profit sharing plans.
In sports, you’ll often hear the coach tell their players that, “if you want to work on your offense, work on your defense.” This concept isn’t foreign to members of the financial world, either. The same principle can be found in that age-old saying of, “a penny saved is a penny earned.” A defensive financial strategy means crafting a deliberate approach to protecting one’s assets from the likes of creditors and frivolous lawsuits. In this day and age, the threat is very real. The list above, although specific to the State of Florida, carries with it general themes that may apply in other states. For those of a high-risk profile, such as physicians, athletes, public figures, and high-net worth individuals, the ideas behind the preceding techniques are critical to a well-designed and comprehensive wealth management strategy. However, basic measures to protect one’s personal wealth apply to anyone that values security in their financial life.