June 20, 2021

Protecting your Assets in Florida: Which Assets are Protected by Florida Law?

Posted by | In Business Law

Florida has arguably some of the best laws in the country when it comes to protecting your assets from creditors. Some of these asset protection laws are found in the Florida statutes (statutory law) and some are derived from Florida’s judicial precedence or customs (common law). In fact, Florida has an entire statutory chapter—Chapter 222—that lists out the assets that are statutorily protected from creditors here in Florida.

This Article will discuss which assets are protected by Florida law. As with any planning, we highly recommend that you sit down with a competent attorney before engaging in any proactive asset protection. Asset protection is a very complex field and the laws are constantly changing.

Life Insurance is Creditor Protected in Florida

The cash value of a life insurance policy is completely excluded from attachment, garnishment, or any legal process in favor of any creditor in Florida. This means that whole life and universal life insurance policies are good to use if asset protection is important since whole life and universal life policies provide a cash value over time. Term policies do not provide a cash value.

Example: Jose’s construction business had a rough year. He had to close down his business and has many creditors that have judgments against his business. Jose has a million dollar whole life insurance policy with a cash value of $150,000. Not only is the $150,000 completely protected from Jose’s creditors here in Florida, but Jose can also take a loan against the cash value of his life insurance policy and the loaned monies would also be protected from his creditors.

Life insurance proceeds—also known as the death benefit—are also exempt from creditor claims here in Florida as long as the insurance policy does not go through the Last Will and Testament and go through probate court. If a life insurance policy does not have a beneficiary or the beneficiary is the estate, then the life insurance proceeds are no longer protected and subject to the creditor claims of the deceased.

Example: Joe has a $2 million dollar whole life insurance policy. He forgets to name his spouse, Topenga, as the beneficiary of his life insurance policy. Joe passes away with a significant amount of business debt, credit card debt, and hospital bills. Since Joe did not name a beneficiary listed on his life insurance policy, the proceeds from the life insurance policy must go through his Last Will and Testament and go through probate. His $2 million dollar life insurance policy will now be subject to the claims of his creditors and the life insurance creditor exemption will be lost.

Most Annuities are Creditor Protected in Florida

Annuities are often used as asset protection tools here in Florida because they are generally exempt from creditor claims under Florida Statutes. There are many different types of annuities, but the general idea behind an annuity is that you are paying someone a set amount that is disbursed in increments over a certain period of time. Annuities can either be created by private contracts—known as private annuities—or they can be created through contracts with traditional life insurance companies.

Private annuities are often treated by courts here in Florida as not creditor protected. So be careful about creating a private annuity with your rich relative. However, annuities offered by traditional life insurance companies are creditor protected here in Florida.

Example: Pam owns a very successful business here in Florida. She uses a million dollars to purchase an annuity contract with MetLife insurance. Pam is later sued due to an accident that occurred at her business.

Result: Since the annuity is offered by a traditional life insurance company it will be protected from Pam’s creditor claims.

Not only are annuities exempt from creditor claims, but the cash value of an annuity is also exempt from creditor claims (Goldenberg v. Sawczak — https://casetext.com/case/goldenberg-v-sawczak).

Retirement Accounts are Creditor Protected in Florida

Investing in retirement plans is not only a great idea for tax and financial planning, but they are also great tools for protecting your assets from creditors. Federal and Florida laws protect retirement monies that are held in traditional retirement accounts (e.g. IRA, 401(k), 403(b), etc.) from creditor claims.

Example: George owns a solo CPA firm. He invests every year in both his traditional and Roth IRA accounts for the tax benefits. George is later sued by a client due to an error that George made while preparing the client’s tax return.

Result: All of the monies held in George’s Roth and traditional IRAs will be completely protected from the creditor claim.

Are Distributions or Withdrawals From Retirement Accounts Also Protected from Creditor Claims in Florida?

No. Distributions or withdrawals from retirement accounts are not protected against creditor claims in Florida.

Are Health Savings Accounts Creditor Protected Here in Florida?

Yes. Health Savings Accounts (HSAs) are creditor protected from creditor claims in Florida.

Are College Funds Set Up for Children Creditor Protected Here in Florida?

Yes. College funds that are considered to be qualified tuition programs (e.g. Florida Bright Futures) are creditor protected here in Florida.

Are Inherited Retirement Accounts Protected in Florida?

Whether an inherited retirement account is protected or not depends on whether a spouse or non-spouse is inheriting the IRA. In Florida, an inherited retirement account that is transferred to a surviving spouse will be protected from creditor claims. However, the U.S. Supreme Court has ruled that a non-spouse inherited retirement account is not protected from the non-spouse’s creditors (Clark v. Rameker — https://www.scotusblog.com/case-files/cases/clark-v-rameker/).

Inherited retirement accounts by a non-spouse are creditor protected here in Florida if the non-spouse beneficiary is a Florida resident. There are also a few other states that protect inherited retirement accounts by a non-spouse beneficiary, but the vast majority of states do not creditor protect inherited retirement accounts by a non-spouse beneficiary.

Example: Michael Jordan dies leaving a 1.5 million dollar traditional IRA to his son, Lebron James. Lebron lives in California where inherited IRAs are not creditor protected by a non-spouse beneficiary. Lebron is sued shortly after receiving the inherited IRA for some not well thought out tweets he made on Twitter and has a judgment entered against him.

Result: Since Lebron lives in a state that does not protect inherited IRAs for non-spouse beneficiaries, the judgment creditor can now reach out and grab the unprotected IRA that Lebron received from his father. If Michael wanted to protect the IRA for his son who lived in California, he could have set up an IRA trust for Lebron. The IRA trust would have protected the inherited IRA funds.

Note: The law is still unclear as to whether an inherited IRA that is not rolled over by a surviving spouse is creditor protected. While the answer is most likely that the non-rolled over inherited IRA is protected in the hands of a surviving spouse, it is always recommend for the surviving spouse to roll over the IRA into their own IRA so that the deceased spouse’s IRA is creditor exempt.

Bishop L Toups

Bishop L. Toups is an estate planning, elder law, and tax attorney in Southwest Florida.

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