Asset Protection (A/P) vs. Tax Shelter Craze
For those readers who are old enough to appreciate the analogy, the recent asset protection (“A/P”) craze, especially among physicians, has a lot in common with the tax shelter craze of the late 70’s and early 80’s. Back then, rational businessmen invested in convoluted, pre-packaged ventures only to later find that the emperor had no clothes.
The fundamental problem with tax shelters was that they were primarily designed to reduce taxes by taking inappropriate advantage of rules — not to make profitable investments. They violated the spirit of the law. Many A/P attorneys today are making the same mistake: protecting business assets from creditors of the business runs counter to public policy.
Florida’s Favorable Individual Protections
Florida law already provides generous exemptions for individuals:
- Homesteads
- Retirement plans
- Life insurance
- Annuities
- College savings plans
- Wages of the head of a household
There are also quasi-exemptions, such as property owned by spouses as tenants by the entireties and charging order protection for partnership/LLC interests.
Business-Side Vulnerabilities
Corporations, LLCs, and LLPs shield owners from entity-level liabilities, but the entities themselves do not get exemptions — so their assets remain exposed. This leads to attempts at entity-level A/P strategies.
Benefit Programs
Many attorneys, CPAs, and banks promote Benefit Programs as vehicles for small-business A/P. Typically, these involve:
- A bank loan
- A lien on receivables
- A life insurance or annuity contract
- A deferred compensation arrangement
Two Types of Benefit Plans
- Loan-to-Physician: Bank loans directly to physicians, secured by insurance/annuity contracts and guaranteed by the P.A. with receivables pledged.
- Loan-to-P.A.: P.A. borrows against receivables, then transfers assets/insurance contracts to physicians, often triggering adverse tax consequences.
Problems with Benefit Programs
Just as tax shelters failed because they were economically irrational, BP’s are counterproductive. They invite creditor attacks through:
- Fraudulent transfer claims
- Fraudulent conversion claims
- Fiduciary duty claims
Fraudulent Transfers
Under Fla. Stat. Chapter 726, transfers are fraudulent if:
- Made with actual intent to hinder, delay, or defraud creditors
- Or made without reasonably equivalent value while insolvent.
“Badges of fraud” such as transfers to insiders, insolvency, or pledges of receivables for personal benefit make Benefit Plans highly vulnerable. Avoid hiring professionals who hold themselves out as asset protection specialists. That simple fact can be considered strong evidence of intent to hinder.
Fraudulent Conversion
Converting reachable assets (cash) into exempt assets (insurance, annuities) with intent to hinder creditors is void. The statute of limitations is four years.
Fiduciary Duties
When insolvent, fiduciary duties of corporate directors and officers shift from shareholders to creditors. Directors and officers who approve Benefit Plans can be personally liable if the Benefit Plans confer improper personal benefits or pay unlawful dividends.
Group Practice Risks
The larger the group, the larger the asset protection nightmare. Each physician’s receivables are exposed to malpractice claims of all group members, and fiduciary liability can spread even to innocent physicians.
Example: Dr. Guilty & Dr. Innocent
A P.A. with two physicians enters into a Benefit Plan. After malpractice by Dr. Guilty, the plaintiff pursues fraudulent transfer claims against both physicians. The Benefit Plan make the physicians appear as schemers, thereby accelerating creditor remedies. Ultimately, the group dissolves after a costly settlement.
Starting Over
After judgment, forming a new entity may trigger “successor liability” if operations are substantially identical. Transfer of patient records, goodwill, wages, and even noncompete covenants can be challenged as fraudulent transfers.
Bankruptcy can sometimes be part of a restart plan, but the 2005 Act significantly limits exemptions and Chapter 7 access for higher-income debtors.
Closing Comments
Judges want their judgments to have meaning and they wield broad equitable powers to enforce them. There is no silver bullet. Off-the-shelf Benefit Plans often worsen the situation rather than provide protection.
