Good News for Creditors – Even States That Have Adopted Homestead Exemptions Laws Wont Always Protect Deadbeat Debtors Who Engage in Fraud
Why do so many fraudsters live in Florida? Some would say it is the climate but more probably, it’s Florida’s unlimited homestead exemption. Under Florida law, creditors cannot force the sale of one’s primary residence to satisfy claims and judgments. Many asset recovery lawyers and creditors believe that protection is absolute and simply give up. It’s not.
While Florida and that of a few other states (e.g. Texas) have very powerful asset protection laws to protect residents, courts have started to place limits on these statutes in the event of fraud.
In June of 2010, the United States Tax Court ruled that the IRS could pursue a condominium property that had been transferred from father to son at the time the father owed $112,000 to the IRS. Dad transferred the property to his son for $10, a sum well below the value of the property. Although the son lived in the condo and it declared it to be his homestead, the court said the IRS could set aside the sale from dad to son. The court ruled dad’s transfer to the son back in 2003 was made for the purpose of avoiding his debt to the IRS and was therefore a fraudulent conveyance.
Even though Florida has one of the strongest homestead protection laws in the nation, the court ruled that a transfer of a home to avoid creditors can be set aside in certain circumstances. Transfer made without proper consideration and made with the intent to defraud creditors are considered a “fraudulent conveyance.”
Why is this case significant? First, Florida has strong asset protection laws that protect residents from claims against their property. In Florida, creditors can pursue bank accounts, businesses, automobiles and vacation homes… just about everything except a person’s homestead. Although the son had acquired the property 7 years ago and made the condo his primary residence, the court said it could still be sold to satisfy the father’s tax debt.
In an interesting twist, had the sone cared for the father – assuming dad was elderly and need home care, the court may have ruled differently. That’s because care could have qualified as consideration.
The case is also significant because fraudsters routinely transfer real estate to friends and relatives for nominal consideration. Often this ruse works; suing a third party and proving their acquisition of the property was fraudulent is no easy task.
Internal Revenue Code sec. 6901(a) provides that the liability of a transferee of a taxpayer’s property may be “assessed, paid, and collected in the same manner and subject to the same provisions and limitations as in the case of the taxes with respect to which the liabilities were incurred.” The transferee is the person who acquired the property, in this case the son.
Although this decision came from U.S. Tax Court, the judge looked to Florida’s Uniform Fraudulent Transfer Act in deciding the case. Most states have adopted the same law.
It’s one thing to sell your home in an arm’s length transaction but here the son knew that dad was deeply in debt to the IRS and wss “selling” the house for just $10. That allowed the IRS to go after the son’s house to satisfy dad’s debt. The court demonstrated there are limits on asset protections laws and those that engage in fraud should beware. Simply because a debtor transfers a valuable asset doesn’t mean the court won’t consider the transfer to be a fraudlent conveyance. Scott Rubenstein v. Commissioner of Internal Revenue Service, 134 T.C. No. 13 (June 7, 2010).
Asset protection and homestead laws remain a valuable tool for people seeking protection against creditors and runaway jury awards. When it comes to transferring property, however, timing is everything. Unfortunately, most people do not engage in asset protection until after they have been sued or incurred a huge debt. The doctor that attempts to put his home in a trust the day after he botches a surgery or the father that sells his condo to his son for $10 after he is insolvent and owes the IRS $100,000 generally will find it much more difficult to protect their homes from savvy creditors.
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Attorney Brian Mahany and the fraud recovery lawyers at Mahany Law help victims of fraudulent conveyances and Ponzi schemes recover their money, anywhere in the nation. Whether you are a business or an individual, we can help recover your hard earned money. Even if you already have a judgment and are unable to collect, we may still be able to help.
Asset recovery is a unique area of law very different from traditional collections. We help victims get back their money even if the debtor’s asset has been transferred into another person’s name.
For more details, visit our fraudulent conveyance information page. Ready to see if you have a case? Contact attorney Brian Mahany online, by email or by phone (202) 800-9791. All inquiries kept strictly confidential.