Florida takes a lot of pride in its balanced budget. Part of the effort to maintain a balanced budget is public policy protecting homes and families. Through both its Constitution and statutes, Florida protects home and families from creditors who might take their money and home.
The federal government recognizes a similar need to protect citizens and avoid making them dependent on the government for support, but not to the extent of Florida’s protection. For example, wages are a source of payment creditors may pursue. After a judgment, a creditor can ask the court to issue a writ of garnishment to an employer (or anyone else holding funds due the creditors) ordering that person to pay the creditor instead of the debtor. Federal law limits garnishment of wages to the lesser of 20% of disposable earnings or weekly disposable earnings less 30 times the federal minimum wage. If a debtor is head of a family in Florida, all of the debtor’s disposable earnings are exempt from creditor claims. Head of a family is any natural person providing more than one-half of the support for a child or other dependent.
To claim head of family status, a person must either show a legal duty to maintain arising under a family relationship at law or a communal living by at least two persons with one recognized as being in charge. Head of family does not have to reside in the same house with the spouse or children to remain head of the family for the exemption of wages from garnishment. Florida courts have ruled the obligation to support is controlling. Earnings continue to be exempt from creditor claims for six months after deposit in the bank.
Wages are not the only source of income protected in Florida. Cash value of life insurance policies (which can be acquired via loans) are exempt as are the cash value and income stream of annuities. Florida courts have confirmed that the incomes from traditional annuities remains protected after deposit in the bank.
It does not appear at all annuity are protected. Arrangements for payment overtime, which can be created in form of a trust or private annuity, are likely not exempt. Florida courts have agreed a protected annuity is one which is issued by a party licensed to underwrite risk. That generally means insurance companies.
Cash value of a life insurance policy is protected. Cash value is the amount the policy holder will receive if the policy is surrendered to the carrier. Loans can be taken against cash value. There is no special statutory treatment for proceeds from life insurance. But, since those proceeds generally pass direct to a beneficiary and outside of probate, they are also not reachable by creditors. If the policy ends up being paid to the decedent’s estate because of a failure to name beneficiaries or because all of the named beneficiaries fail to survive the decedent, they are reachable by creditors as assets of the probate estate.
Federal law protects qualified retirement plans (generally employer provided plans covered by ERISA’s fiduciary rules). Florida law extends that protection to include individual retirement accounts. These accounts retain protection after death if it passes directly to a beneficiary. They may become available to creditors if they do not pass direct to a beneficiary and end up as part of a probate estate, where creditors can make claims. Out of state beneficiaries may find the beneficiary’s creditors can reach the inherited IRA as the law of the beneficiary’s state of domicile will likely be controlling.
Federal law finds super protection for social security benefits and protects them for two months after deposit into the bank. In 2011, Congress passed a law requiring banks review accounts to determine if social security funds have been deposited when a creditor attempts garnishment. The bank has burden to protect the debtor’s social security money. In most other efforts by a creditor to obtain funds from a bank account, the burden is on the debtor to show the court that the funds in the account are exempt.
Certain “special” accounts are also protected in Florida. Funds in a qualified tuition program under Section 529 of the Internal Revenue Code, including the Florida Prepaid College Trust Fund, are exempt from creditor claims. Coverdell Educational Savings Accounts (also known as education IRAs), are exempt. Health savings accounts or medical savings accounts authorized under Sections 220 and 223 of the Internal Revenue Code are protected.
There is even more protection available if the debtor is married. Assets owned by a married couple as tenancy by the entireties, are jointly owned with right of survivorship. Tenancy by the entireties can only exist between persons married to each other. It does not include assets which are owned in the survivorship manner with a non-spouse. In Florida, each spouse is considered owning an undivided 100% interest in the entireties asset. That makes the asset exempt from creditor claims of one spouse. Entireties assets are not exempt from joint creditors or super creditors (such as the IRS). The exemption is lost if the non-debtor spouse dies or the couple divorces.
What about home? Florida’s Constitution protects homestead property from forced sale and creditor liens, with three exceptions. Those exceptions are payment of taxes and assessments, obligations contracted for purchase, improvement or repair or obligations contracted for labor performed on the homestead. Homestead is limited to 160 acres if outside of a city and one half acre within city limits and is further limited to the residence of the owner or the owner’s family. If homestead is sold, the proceeds can be protected as long as they are going to be used to buy a replacement homestead. The homestead exemption passes to the surviving spouse or heirs, so the homestead is protected from the debtor’s creditors even after death if it goes to spouse or heirs.
These Florida debtor protections are only available to Florida residents. That means, you must be domiciled in Florida to take advantage of Florida’s protection. For those with actual or threatened creditor issues, Florida is an attractive destination for permanent residence.
William G. Morris is the principal of William G. Morris, P.A. William G. Morris and his firm have represented clients in Collier County for over 30 years. His practice includes litigation and divorce, business law, estate planning, associations and real estate. The information in this column is general in nature and not intended as legal advice.