How Protected Are My Assets?
In these times of uncertainty and financial meltdowns, its good to know what assets are protected from creditors. Florida law is one of the more protective states when it comes to keeping creditors at bay and protecting its citizens assets. Chapter 222 of the Florida Statutes provides exemption from creditors for such things as wages, life insurance and annuities. In addition, Florida recognizes common law protection from creditors attachment to property that is jointly titled in the name of a husband and wife when only one of the spouses is the debtor. Lastly, Florida’s Constitution Article X, Section 4 protects a person’s homestead residence from forced sale by creditors. Of course there are exceptions to all of these protections. This article will give you a general idea of what is protected and some of the recognized exceptions by Florida’s courts.
Wage Exemption: Florida Statute 222.11
This statute exempts from attachment and garnishment all of the disposable earnings of a head of family that is equal to $500.00 or less per week. Those earnings of the head of household that are greater than $500.00 may not be attached or garnished unless such person has agreed in writing to their attachment and garnishment; however, any amount attached or garnished may not exceed the amount allowed under the Federal Consumer Protection Act. If the debtor is not the head of the household, the only limitation to attachment or garnishment of a person’s wages are those allowed under the same Consumer Protection Act.
Florida’s Wage exemption statute also protects those earnings that are credited or deposited in any financial institution from attachment or garnishment for 6 months after the earnings are received by the financial institution provided the funds can be traced and properly identified as earnings. Even if the funds are commingled with other non-exempt funds, the exempt funds will not be exposed to creditors provided the head of the family’s exempt earnings are traceable under the statute.
However, before you claim your wages exempt from creditors, there are a few obstacles you will have to overcome. The first one is that if you are the owner of a business and are paying yourself a salary, your earnings may not be exempt if you have control over the timing and amount of compensation being paid. The courts consider your income a discretionary draw and not earnings which would be considered exempt.
Independent contractors face the same hurdle as owners of a business but may be able to claim their earnings exempt provided they receive regular compensation that is dictated by the terms of an arms length employment agreement with an employer. Commission payments are also suspect as to its exempt status but may be considered exempt provided the payment of those commissions is from services in a highly regulated industry where the payment of such commissions is based on a set of policies and procedures for determining and paying commissions. Lastly, wage exemptions may not apply to child support or alimony payments.
If you are concerned whether your earnings are exempt, it is suggested that: 1) you deposit your earnings into a separate bank account to prevent commingling with non-exempt income; 2) make certain your earnings are for personal services from an employer or your earnings are based on an employment contract negotiated at arms length; and, 3) Make certain your employer provides all equipment, work space and support during your employment. If you are still uncertain whether you fall into an exempt wage category, contact your attorney and discuss your situation with him or her.
Life Insurance – Florida Statute 222.14
The cash surrender values from Whole Life and Universal Life insurance policies are generally exempt from the claims of creditors. It is very important that the product purchased is a true life insurance policy and not contrived to be an investment vehicle. If the product is viewed as an investment it will be outside the exemption of the statute and be perceived as non-exempt from claims of creditors.
In the event of death of the insured, the benefit payout to the designated beneficiaries is also exempt from claims of creditors. However, if the proceeds are paid to the estate, (e.g. when there are no named beneficiaries in the insurance policy) the funds become a part of the decedent’s estate and possibly subject to claims of creditors.
Once again, if you are uncertain whether your life insurance policy and the cash surrender value is exempt, contact your attorney and have a discussion regarding your estate’s insurance policy.
Annuities – Florida Statute 222.14
Annuities are treated much the same as the cash surrender value of life insurance policies. Florida’s Supreme Court has held that payments from an annuity are not reachable by creditors. Thus the suggestion that you should place your annuity payment into a separate account like that of wage earnings is strongly recommended to protect it from a claim by creditors that the funds have been commingled with non-exempt funds. However, be leery of annuity contracts from organizations not licensed to underwrite such products in the State of Florida because Florida’s Courts have ruled that such annuity payments are not exempt from creditors. Therefore, before you purchase an annuity you should make certain that the annuity is from a reputable company licensed to underwrite in Florida and not a privately arranged product.
Titling of Property – Tenants by the Entirety (non-homestead property)
Florida Courts have held that upon the death of either the husband or wife of jointly owned property, that the property inures 100% to the survivor. When this occurs, any debt incurred by the deceased spouse cannot attach itself to the jointly owned property since it is automatically owned by the surviving spouse at death. More importantly, during life, when one of the spouses incurs a debt, the creditor cannot attach to the Tenant by Entireties property because the title to the property is considered a single entity not separable by the creditor. However, this protection does not occur when the debt is joint (e.g. husband and wife both sign up to accept a credit card) or upon the death of one of the spouses, the surviving spouse is the one who has a judgment or debt charged against them. In that event, the property becomes subject to attachment.
Homestead Property – Article X, Section 4
Florida’s residential property is also protected from creditors regardless of how the property is titled provided at the death of the owner, the owner does not require the property to be sold and the proceeds distributed according to the decedent’s testamentary document. However, there is no protection against creditors for claim of liens from contractors, mortgages or unsecured loans where the loan proceeds can be traced to improving the homestead property.
Creditor Exceptions and Fraudulent Transfers:
You should also be aware that the IRS is considered a super-creditor who may not have to play by the exemption rules of Florida law. If you suspect that you may be subject to levy by the IRS, it is strongly recommended that you contact an attorney who is familiar with IRS tactics and learn what the IRS can and cannot do to your real and personal property.
One last thing you should be cautious about. If you suspect that you may be the victim of a creditor preparing to attach or garnish your property and you begin transferring property from non-exempt to exempt status, Florida law can force those assets to be made available to the creditor under Florida’s Uniform Fraudulent Transfer Act (FUFTA). Therefore, before you begin making major transfers of your property to an exempt status, have a frank and open dialog with your attorney before executing the transfer. It could save you thousands of dollars in litigation costs.
In future articles we’ll discuss FUFTA in greater detail as to what you can and can’t do when making transfers to avoid attachment by creditors.