Estate and Succession Planning
Dean Mead’s Estate and Succession Planning Department is one of the largest and most respected groups of estate planning attorneys in Florida. We are frequently…
Dean Mead’s Estate and Succession Planning Department is one of the largest and most respected groups of estate planning attorneys in Florida. We are frequently…
Dean Mead’s Tax Department handles tax planning issues for businesses and individuals. The attorneys in our department have extensive experience in a full range of…
The following article was recently submitted to Leimberg Information Services by Lauren Detzel and Brian Malec, contributors to this blog.
Leimberg Article
Executive Summary: In LISI Asset Protection Planning Newsletter #173, we reported on Florida’s legislative efforts to statutorily protect inherited IRAs from the claims of creditors of a debtor beneficiary under Florida state law. We are happy to report that on April 29, House Bill 469 was sent to the Governor for signature after unanimously passing both the Florida Senate and House.
HB 469 amends Section 222.21 by inserting the following underlined language:
“any interest in any fund or account that is exempt from claims of creditors of the owner, beneficiary or participant . . . does not cease to be exempt after the owner’s death by reason of a direct transfer or eligible rollover . . . including, but not limited to, a direct transfer or eligible rollover to an inherited individual retirement account as defined in s. 408(d)(3) of the Internal Revenue Code of 1986, as amended.”
In addition, HB 469 adds Section 222.21(c), which provides that “this paragraph is intended to clarify existing law, is remedial in nature, and shall have retroactive application to all inherited individual retirement accounts without regard to the date an account was created.”
This amendment to Section 222.21 has widespread importance to not only current beneficiaries of inherited IRAs who reside in Florida but also nonresidents who are considering whether or not to name a Florida resident as a designated beneficiary of a retirement plan. It is important to remember that the governing law of the designated beneficiary’s domicile will control whether the assets of an inherited IRA are protected from the claims of the designated beneficiary’s creditors, not the governing law of the domicile of the retirement plan owner.
Once HB 469 is enacted, an inherited IRA of a Florida resident debtor should be protected in both state court and bankruptcy court (see In re Mathusa ). However, practitioners may still want to explore the use of a conduit trust or accumulation trust as the designated beneficiary of a retirement plan instead of naming a Florida resident in order to guard against a designated beneficiary relocating to an unfavorable jurisdiction or future changes in the state law.
In another important legislative development in Florida, House Bill 253 has been sent to the Governor after passing both the House and the Senate with only a single dissenting vote. HB 253 is the legislative patch created in response to the 2010 Florida Supreme Court decision of Olmstead v. FTC, in which the Court held that, with respect to single member LLCs in Florida, the charging order was not the exclusive remedy available to a creditor holding a judgment against the sole member of a Florida LLC. This patch is important to both Florida residents and nonresidents considering whether to use a Florida single or multi-member LLC to hold assets (such as a vacation home) located either inside or outside the State of Florida.
Facts: On June 24, 2010, the Florida Supreme Court issued the opinion of Olmstead v. FTC . In Olmstead, the FTC obtained injunctive relief and a judgment for more than $10 million against two individuals who were found to be operating a credit card scam. The FTC obtained an order from the lower court requiring the debtors to surrender all right, title and interest in several single member LLCs owned by them to satisfy the outstanding judgment. On appeal, the debtors argued that the only remedy available against their ownership interests in the single-member LLCs was a charging order under the language of Section 608.433(4) of the Florida Statutes.
Under the law applicable to the Olmstead debtors, Section 608.433(4) of the Florida Statutes provided:
On application to a court of competent jurisdiction by any judgment creditor of a member, the court may charge the limited liability company membership interest of the member with payment of the unsatisfied amount of the judgment with interest. To the extent so charged, the judgment creditor has only the rights of an assignee of such interest. This chapter does not deprive any member of the benefit of any exemption laws applicable to the member’s interest.
Based on the language of Section 608.433(4), the Florida Supreme Court held that the charging order was not the exclusive remedy available to a creditor holding a judgment against the sole member of a Florida single-member LLC and ordered the debtors to surrender all right, title and interest to in the LLCs to satisfy the outstanding judgment.
The Court noted that the language of Section 608.433(4) stood “in stark contrast to the charging order provisions in both the Florida Revised Uniform Partnership Act (FRUPA) and the Florida Revised Uniform Limited Partnership Act (FRULPA).” Under both FRUPA and FRULPA, the relevant statutes expressly provide that the charging order is the “exclusive remedy” by which a judgment creditor of a partner or transferee may satisfy a judgment out of the judgment debtor’s transferable interest in the partnership or limited partnership.
The Court stated that the “Legislature has shown . . . that it knows how to make clear that a charging order remedy is an exclusive remedy.” The Court reasoned that the absence of the exclusivity language in Section 608.433 distinguished it from the FRUPA and FRULPA provisions and, therefore, the Court should not interpret Section 608.433 to make the charging order the exclusive remedy.
Although the holding in Olmstead may have been foreseeable given holdings in similar cases from other jurisdictions (such as In re Albright ), what surpised and troubled practioners was the reasoning of the Court to get that result, because Section 608.433(4) is also applicable to multi-member LLCs. The Court did not, however, attempt to distinguish multi-member LLCs. In fact, the dissenting Justices specifically expressed the concern that the majority’s reasoning was not limited to single-member LLCs and also expressed a desire for the Legislature to clarify the law in this area.
Within weeks of the opinion, members of the Florida Bar Tax Section and RPPTL Sections formed a joint task force to find a legislative resolution. Given the uncertainty created by the Olmstead decision, and the time necessary to enact remedial legislation, many practitioners advised clients in the interim to (i) convert Florida multi-member LLCs to Florida limited liability partnerships or limited liability limited partnerships, or (ii) move Florida LLCs to other jurisdictions where a charging order was clearly the sole and exclusive remedy against a member’s interest in a multi-member LLC.
Despite significant headwinds from other lobbying groups in Florida, the task force (also later joined by the Business Law Section) recently reached a compromise in House Bill 253. This revised bill has now passed both the House and the Senate and has been sent to the Governor for signture.
HB 253 amends Section 608.433 in several ways. Notably, Subsection 5 has been added to expressly provide that “Except as provided in subsections 6 and 7, a charging order is the sole and exclusive remedy by which a judgment creditor of a member or member’s assignee may satisfy a judgment from the judgment debtor’s interest in a limited liability company or rights to distributions from the limited liability company.” The exceptions in Subsections 6 and 7, apply only to single-member LLCs. Therefore, the charging order will be the sole and exclusive remedy available to a judgment creditor of a member or member’s assignee of a multi-member LLC.
Subsection 6 has been added to provide that, solely with respect to a single-member LLC, a charging order is not the sole and exclusive remedy if the judgment creditor can establish to the satisfaction of the court that distributions under a charging order will not satisfy the judgment within a reasonable time. Upon such a showing, the court is authorized to order a foreclosure sale of the LLC interest. The showing may be made at any time after the entry of the judgment or at the same time the judgment creditor applies for a charging order.
Subsection 7 has been added to provide that, solely with respect to a single-member LLC, if a court orders the foreclosure sale of a debtor’s LLC interest or of a charging order lien against the sole member’s LLC interest pursuant to Subsection 6, (i) the purchaser at the sale obtains the member’s entire LLC interest and becomes the member of the LLC, and (ii) the debtor ceases to be a member in the LLC.
Subsection 8 has been added to explicitly prohibit the remedy of foreclosure against a member’s interest in a multi-member LLC.
Subsection 9 has been added to clarify that nothing contained in Section 608.433 shall limit (i) the rights of a secured creditor, (ii) the principles of law and equity which affect fraudulent transfers, (iii) the availability of equitable principles of alter ego, equitable lien or constructive trust, or other equitable principles not inconsistent with Section 608.433, or (iv) the jurisdiction of the court to enforce the charging order in a manner consistent with Section 608.433.
Finally, Section 2 of HB 253 provides that the amendments to Section 608.433 are intended to be clarifying and remedial in nature and shall apply retroactively.
Comment: This legislation is significant not only for what it says but for what is not included in the statute. Despite vigorous attempts to insert provisions that would have disregarded “nominal” interests of multiple member LLCs (which would have then allowed for the application of the special single member LLC rule), no such provisions were included in the bill. Trying to define what would be considered “nominal” and/or applying a constructive ownership concept for interests owned by family members or grantor trusts as proposed would result in arbitrary and many times inconsistent results. Therefore, the statute instead merely refers to equitable principles to allow a court to make a determination on a case by case basis if any interests will be disregarded.
Further, it is believed that the process and policy analysis employed by the drafters of this compromise bill will be instructive to other states struggling with balancing the public policy concerns of protecting the innocent partner with protecting the rights of a creditor. We know of no other state that has differing rules for applying the charging order to members of single versus multiple member LLCs. Nonetheless, to protect legitimate creditors but at the same time protect the innocent partners of a debtor we determined this bifurcation was necessary.
Although this statute may not provide the level of protection afforded single member LLCs by a few other states (such as Wyoming or Delaware), it is believed that it protects the interests of business owners in all but the most egregious cases.