April 4, 2013 – Joint Trusts, Operating Agreements and Sexual Predators





 We welcome contributions for future Thursday Report topics. If you are interested in making a contribution as a guest writer, please email Janine Ruggiero at Janine@gassmanpa.com.

This report and other Thursday Reports can be found on our website at www.gassmanlaw.com.


The new joint trust (JEST) system that we have developed was published last night in a LISI Newsletter.

You can review the article by clicking here, and the accompanying chart can be viewed by clicking here.

We appreciate all questions, comments and suggestions.

This new joint trust structure gives clients the best chance to simplify their asset logistics to have one revocable trust instead of two during their joint lifetime, provides a structure that can enable a full step-up in basis for all joint assets depending upon drafting and circumstances, and provides for all trust assets to be used to fund one or more credit shelter trusts.

The joint trust structure that we have developed is not without risk. The IRS may take the position that the full step-up in basis does not apply on the first death, although we believe that the mechanism that we have designed can facilitate a reliable step-up in basis, depending upon how the techniques are used.

The Service might also argue that the surviving spouse has actually made a gift into the credit shelter trust arrangement on the first dying spouse’s death, but for many clients this will yield a better result than if there was no gift or additional credit shelter trust funding, and our article describes ways to ameliorate the risk or to take advantage of the defective grantor trust rules if a part of the credit shelter disposition would be characterized by the IRS as a gift.

Married couples who do not expect to ever have an estate tax challenge because of a relatively small asset base will appreciate having one trust that they can share, and married couples who have the estate tax challenge but would also like to have a stepped-up basis and assurances that all joint assets will be “locked up” for the protection of the surviving spouse and family members may prefer this approach.

Creditor protection planning will be impacted by a joint trust arrangement, which will not be considered a tenancy by the entireties ownership by the spouses. Married couples with significant creditor protection concerns will probably not use these trusts.


The executory contract question, and the recent sandstorm over Soderstrom.

Florida Statute Section 608.433 provides that the creditor of a member of a multiple member LLC has only one remedy – the charging order – which gives the creditor only the right to receive distributions if and when the LLC ever makes a distribution.

But what if the debtor goes bankrupt? Can the trustee in bankruptcy step into the debtor’s shoes and “take over” the LLC and liquidate it if the debtor had the right to?

Under 11 U.S.C. § 365, a trustee in a bankruptcy proceeding cannot step into the debtor’s shoes if the operating or limited partnership agreement of the entity is an “executory contract.” The term “executory contract” is not defined under the Bankruptcy Code, but the common law definition of executory contract is a contract that both parties have substantial duties under.

Many practitioners are unaware of this requirement and have not placed substantial duties on the part of each member in the agreement. Does this mean that the members of LLCs and partners of partnerships who go bankrupt will have their entity interests seized by the trustee in bankruptcy, thus permitting the trustee a management vote in the debtor’s place?

Hopefully the answer is that there is no need to have substantial contractual responsibilities on the part of the debtor because of a relatively new movement by the Courts of Appeal in finding that a contract will be considered to be executory i“if it’s assumption [or] rejection would ultimately benefit the estate or its creditors.” Thompkins v. Lil’ Joe Records Inc., 476 F.3d 1294, 1306 n. 13 (11th Cir. 2007).

Our initial draft article on the 11th Circuit Soderstrom case is as follows. Click here for a copy of the Soderstrom opinion.

Do Your Operating Agreements Offer Charging Order Protection – Almost Every LLC Operating Agreement Will Likely Be Considered an Executory Contract in a Bankruptcy Proceeding – A Soderstrom Thunderstorm for Creditors

By: Alan S. Gassman, Michael C. Markham & Eric Moody

Determining whether an operating agreement is considered executory, and thereby prevents transfer of a management interest in an LLC or similar corporation, is a complex topic and oftentimes comes down to the deciding judge’s call. One recent bankruptcy case, In re Soderstrom, 484 B.R. 874 (M.D. Fla. 2013), offered some degree of clarity as to the test a court should apply in determining whether an operating agreement is executory, but also left open some big questions. Below is our discussion of the case.

Case Description

Soderstrom involved husband and wife debtors (Soderstroms) who filed a joint Chapter 7 bankruptcy petition. The schedules filed with their petition estimated slightly under $1 million in assets and over $11 million in liabilities, a large portion of which were business debts.

One of the Soderstroms’ listed assets was a 50% ownership in an LLC named Plaza N 15 Partners, LLC (Plaza). The Soderstroms listed the value of their interest in Plaza as unknown. The other 50% interest in Plaza was owned by an individual named Scott Buono (Buono).

During the bankruptcy proceedings, the Trustee filed a Notice of Intent to Sell the Soderstroms’ interest in Plaza and two 25% interests in affiliated LLCs for $6,000 in total to a company named Horizons A Far, LLC. Buono and Plaza objected to the Trustee’s Notice because Plaza’s Operating Agreement only permitted the transfer of a membership interest with the written consent of the other members. Buono and Plaza argued that under Plaza’s Operating Agreement the Trustee only had the ability to transfer the “right to share in such profits and losses, to receive such distributions, and to receive such allocations of items of income, gain, loss, deduction or credit to which the assignor was entitled, to the extent assigned, and will not have any of the rights, power or authority of a Member.” Buono and Plaza also objected to the sale because the Soderstroms did not have an interest in the affiliated LLCs, and because there were third parties, including Buono, who were willing to bid more than $6,000 for the interests being sold.

In response, the Trustee argued that Section 541(c)(1)(A) of the Bankruptcy Code applied. Section 541(c)(1)(A) states that “an interest of the debtor in property becomes property of the estate . . . notwithstanding any provision in an agreement . . . that restricts or conditions transfer of such interest by the debtor . . . .” According to the Trustee, this Section rendered the Plaza Operating Agreement unenforceable and permitted Trustee to sell both the economic and non-economic (i.e. management) interests of Plaza. Buono and Plaza countered that the Operating Agreement forbade transfer of a management interest without permission of the other holders of the majority-in-interest. Further, Buono and Plaza argued, even if the Operating Agreement was unenforceable as to the limit on the transfer of the management interest, the Operating Agreement was an executory contract under Section 365(c) of the Bankruptcy Code, and therefore the Trustee was only permitted to sell the economic interest.

Bankruptcy Court Judge Karen Jennemann agreed with Buono and Plaza and only permitted the sale of the Soderstroms’ economic interest in Plaza. The Court held that under Section 541(c)(1)(A) the Trustee would obtain management and economic interests “subject to any applicable sale restrictions imposed by the Operating Agreement.” The Operating Agreement prohibited sale of a management interest without approval of the other members. In other words, the bankruptcy estate now held both the management and economic interests in Plaza, but was forbidden from selling the management interest because of the sale limitation in the Operating Agreement.

Despite sufficient grounds for denying sale of the management interest in Plaza because of the limitation in the Operating Agreement, the Court offered a second ground for its decision–that Section 365(c)(1)(A) also prevented the Trustee from obtaining a management interest because the Operating Agreement was an executory contract “because it requires material continuing fiduciary obligations by its members, including additional capital contributions, loans, and guarantees.”

Under Section 365(c):

The trustee may not assume or assign any executory contract or unexpired lease of the debtor, whether or not such contract or lease prohibits or restricts ssignment of rights or delegation of duties, if—

(1) (A) applicable law excuses a party, other than the debtor, to such contract or lease from accepting performance from or rendering performance to an entity other than the debtor or the debtor in possession, whether or not such contract or lease prohibits or restricts assignment of rights or delegation of duties; and

(B) such party does not consent to such assumption or assignment; . . .

Under Florida Statutes, Section 607.0627, corporations are permitted to restrict transfer of their shares providing the restriction is not manifestly unreasonable, and Florida Statutes, Section 608.422 allows limited liability companies to restrict managers to only those approved by the majority-in-interest of the members.

The Appellant, Horizons A Far (Horizons), objected to the order, but on the grounds that as a creditor of Plaza, they could compel the sale of 100% of Plaza under Section 363(h). The Bankruptcy Court overruled Horizons’ objection for five reasons, including untimely filing, and that Section 363(h) was not applicable because the ownership arrangement was an LLC, not a tenancy in common or joint tenancy, which are the only ownership forms Section 363 applies to. Horizons’ objection and subsequent appeal did not address the Trustee’s original grounds for the right to sell the Soderstroms’ management interest, Section 541(c)(1)(A).

Horizons appealed to the United States District Court, Middle District of Florida, on two grounds: (1) The Court’s Sale Order limiting the sale to the Soderstrom’s economic interests on procedural grounds; and (2) The Court’s finding that the contract was executory.

After rejecting Horizons’ procedural appeal grounds, the Middle District Court addressed whether the Operating Agreement was an executory contract. Eschewing the traditional approach (a contract is executory if both parties have outstanding material obligations under the contract), the Court instead opted to go with the functional approach to determine if a contract is executory because the Court believed that the Eleventh Circuit had implicitly adopted the functional approach.

Under the functional approach, there does not need to be outstanding obligations on the part of both parties. Instead, a contract is executory “if it’s assumption [or] rejection would ultimately benefit the estate or its creditors.” Thompkins v. Lil’ Joe Records Inc., 476 F.3d 1294, 1306 n. 13 (11th Cir. 2007).

If a contract at issue in a bankruptcy case is found to be executory, then Bankruptcy Code Section 365 applies. Under Section 365, if local law permits restrictions on transfer of a management interest and a contract contains such a clause, a Trustee cannot assume and transfer the debtor’s management without consent of the other managing members, which was exactly what the Middle District Court found. The Bankruptcy Court decision was affirmed and Horizons’ alternate arguments were rejected.

The Middle District elected not to rule on the Bankruptcy Court’s Operating Agreement sale restrictions grounds.

Soderstrom’s Impact

Soderstrom provided greater certainty, to some extent as to which test is to be applied to determine whether a contract is executory under the Bankruptcy Code. However, Soderstrom failed to discuss the power of a sale restriction in an operating agreement.

While out in the trenches, many bankruptcy attorneys may still find that court decisions tend to be “results oriented,” the Soderstrom decision at least elected to adopt the functional test for determining whether a contract is executory. Whether this new test, as opposed to the traditional test, helps or hurts a case will still depend on the individual case. However, at the very least, the clarity is welcome.

What Soderstrom did not clear up was whether a sale restriction on a management interest in an operating agreement is enough to prevent sale of such management interest in a bankruptcy proceeding. The Bankruptcy Court decision effectively allows a debtor to circumvent the plain language of Section 541(c)(1)(A) (“An interest of the debtor in property becomes property of the estate . . . notwithstanding any provision in an agreement . . . that restricts or conditions transfer of such interest by the debtor . . .”). Without the ability to sell a management interest, the interest has no value to a trustee. Query whether the estate’s possession of the management interest open the trustee up to new liabilities in terms of the trustee’s management of the management interest?

Further, while a contract that still has a management interest would presumably still be executory and thus exempted from the estate by Section 365, what happens when a “results-oriented” court finds that an operating agreement is not executory? Would that same court prevent a trustee sale based on a sale restriction clause in an operating agreement? For now, we are left to wonder.

We welcome your comments, thoughts, and suggestions about Soderstrom.


For most people, locating nearby sexual offenders and predators may not be on the forefront of their minds when they move into a new home or even when remaining at their current address. Fortunately, locating nearby sexual offenders and predators does not require a large time commitment or even specialized knowledge. The proliferation of Megan’s Law websites in the past 15 years makes this a short and simple process. Sex offender database websites typically provide information about the offender’s crime(s), their physical description, their known addresses, their vehicle, and oftentimes include a recent picture.

Every state plus Washington D.C. maintains their own sexual offender registry website. These websites generally allow anyone to search for registered sexual offenders using different search parameters such as the offender’s name and known address. Florida’s online registry (available by CLICKING HERE) provides a very straightforward interface and will even guide you step-by-step through the search process. The most important feature of Florida’s website is that you can input an address and search for registered sex offenders living within a certain radius of that address. Thus, if a client is moving to a new home, it will take you no more than a few minutes to perform a search of their new neighborhood.

Florida’s website also provides links to the sex offender registries of all other states (available by CLICKING HERE). Another important feature of Florida’s registry is that it permits anyone to sign up for email notifications for when a sex offender moves near a provided address. For example, you can monitor whether a registered offender moves near your client’s home, their office, the local mall, their child’s school, etc.

There is also a national sex offender registry (available by CLICKING HERE). While it may sometimes be more convenient, it does not provide the same flexibility as the various registries maintained by the states do. Also, it appears that some states are better than others in providing the national registry with all of the information available on their state level counterpart. Thus, it may be a good idea to use the national registry in tandem with the respective state website to ensure a thorough search.

Even if you think that your clients live in or are moving to areas that are unlikely to have sex offenders, you may be surprised by the search results. In any case, the search takes a few short moments and your prudence will certainly be appreciated by your clients.


This year Lester Perling and Alan Gassman released their book on Florida and federal anti-kickback, Stark and self-referral laws. The book can be purchased on Amazon and in ebook formats. Click here to purchase your copy.

Chapter 6 of the book covers the Florida Patient Brokering Act, which is a criminal statute that can make part ownership or participation in businesses that sell quasi-medical products or supplies that the doctor refers to illegal.

This could include part ownership of an optical shop, a special fitting shoe store, or wheel chair retailer.

You can read Chapter 6 by clicking here.


Please click here to view a chart of this month’s, last month’s, and the preceding month’s Applicable Federal Rates, because for a sale you can use the lowest of the 3.



THURSDAY, MAY 16, 2013.The Florida Bar Annual Wealth Protection Seminar: “How a Lawyer Can Protect a Client’s Wealth.”
Mark your calendars for this exciting event in Miami, Florida. Speakers include Jonathan Alper, Esq. on Where Does Florida Law Stand on Fraudulent Transfers”; Mitchell Fuerst, Esq. on Introduction to Professional Privilege in Wealth Protection Cases – Civil v Criminal; Tax v Non-Tax; When to Claim the Fifth; How to Do it Right; Michael Markham, Esq. on Recent Asset Protection Case Decisions, Legislation, and Their Importance in Protection Planning; Denis Kleinfeld, Esq. on Where to Situs a Trust – An Analysis of U.S. Asset Protection States; and Alan Gassman, Esq. on Using Estate Planning Techniques to Optimize Family Wealth Preservation. For more information please click here for the brochure or email agassman@gassmanpa.com


TUESDAY, APRIL 23, 2013 5:00 – 5:30 pm.
Please join us for a webinar on The Ten Biggest Mistakes Consumers Make with guest speakers Bill Kahn and Mellissa Allums. This webinar will feature topics such as identity theft, victimization, false advertising and many more. To register for this webinar please click here or email janine@gassmanpa.com

THURSDAY, APRIL 25, 2013, 4:00 – 4:50 pm.
Please join us for the 444 Show – a monthly CLE webinar sponsored by the Clearwater Bar Association and moderated by Alan S. Gassman. This month’s topic is Reading Surveys and Legal Descriptions: Reviewing Surveys in Actual Practice. To register for the webinar please visit www.clearwaterbar.org or email Janine@gassmanpa.com

MONDAY, MAY 6, 2013, 12:30 – 1:00 p.m.
On the first Monday of each month the Clearwater Bar Association presents Lunch Talk. A free monthly webinar series moderated by Alan S. Gassman. This month’s speaker is Mike Shea speaking on Your Law Firm Insurance Package. To register for the webinar please visit www.clearwaterbar.org or email Janine@gassmanpa.com

Alan S. Gassman, J.D., LL.M. is a practicing lawyer and author based in Clearwater, Florida. Mr. Gassman is the founder of the firm Gassman, Crotty & Denicolo, P.A., which focuses on the representation of physicians, high net worth individuals, and business owners in estate planning, taxation, and business and personal matters. He is the lead author on Bloomberg BNA’s Estate Tax Planning and 2011 and 2012, Creditor Protection for Florida Physicians, Gassman & Markham on Florida and Federal Asset Protection Law, A Practical Guide to Kickback and Self-Referral Laws for Florida Physicians, The Florida Physician Advertising Handbook and The Florida Guide to Prescription, Controlled Substance and Pain Medicine Laws, among others. Mr. Gassman is a frequent speaker for continuing education programs, publishes regularly for Bloomberg BNA Tax & Accounting, Estates and Trusts Magazine, Estate Planning Magazine and Leimberg Estate Planning Network (LISI). He holds a law degree and a Masters of Law degree (LL.M.) in Taxation from the University of Florida, and a business degree from Rollins College. Mr. Gassman is board certified by the Florida Bar Association in Estate Planning and Trust Law, and has the Accredited Estate Planner designation for the National Association of Estate Planners & Councils. Mr. Gassman’s email is Agassman@gassmanpa.com.

Thomas J. Ellwanger, J.D., is a lawyer practicing at the Clearwater, Florida firm of Gassman, Crotty & Denicolo, P.A. Mr. Ellwanger received his B.A. in 1970 from Northwestern University and his J.D. with honors in 1974 from the University of Florida College of Law. His practice areas include estate planning, trust and estate administration, personal tax planning and charitable tax planning. Mr. Ellwanger is a Fellow of the American College of Trusts and Estates Counsel (ACTEC). His email address is tom@gassmanpa.com.

Christopher Denicolo, J.D., LL.M. is a partner at the Clearwater, Florida law firm of Gassman, Crotty & Denicolo, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. He has co-authored several handbooks that have been featured in Bloomberg BNA Tax & Accounting, Steve Leimberg’s Estate Planning and Asset Protection Planning Newsletters, and the Florida Bar Journal. He is also the author of the Federal Income Taxation of the Business Entity Chapter of the Florida Bar’s Florida Small Business Practice, Seventh Edition. Mr. Denicolo received his B.A. and B.S. degrees from Florida State University, his J.D. from Stetson University College of Law, and his LL.M. (Estate Planning) from the University of Miami. His email address is Christopher@gassmanpa.com.

Kenneth J. Crotty, J.D., LL.M., is a partner at the Clearwater, Florida law firm of Gassman, Crotty & Denicolo, P.A., where he practices in the areas of estate tax and trust planning, taxation, physician representation, and corporate and business law. Mr. Crotty has co-authored several handbooks that have been published in BNA Tax & Accounting, Estate Planning, Steve Leimberg’s Estate Planning and Asset Protection Planning Newsletters, Estate Planning magazine, and Practical Tax Strategies. Mr. Crotty is also the author of the Limited Liability Company Chapter of the Florida Bar’s Florida Small Business Practice, Seventh Edition. He, Alan Gassman and Christopher Denicolo are the co-authors of the BNA book Estate Tax Planning in 2011 & 2012. His email address is Ken@gassmanpa.com.

Thank you to our law clerks that assisted us in preparing this report:

Kacie Hohnadell is a third-year law student at Stetson University College of Law and is considering pursuing an LL.M. in taxation upon graduation. Kacie is also the Executive Editor of Stetson Law Review and is actively involved in Stetson’s chapter of the Student Animal Legal Defense Fund. In 2010, she received her B.A. from the University of Central Florida in Advertising and Public Relations with a minor in Marketing, and moved to St. Petersburg shortly after graduation to pursue her Juris Doctor. Her email address is Kacie@gassmanpa.com.

Eric Moody graduated from Stetson University College of Law in December 2012 and is currently seeking admission to the Florida Bar. He is considering pursuing an LL.M. in estate planning. While at Stetson, Eric was an Articles and Symposia Editor for the Stetson Law Review. In 2009, Eric received a B.S. in Business Management from the University of South Florida. Eric’s email address is Eric@gassmanpa.com.

Carly Ross is a third-year law student at Stetson University College of Law. She is the Notes and Comments Editor for Stetson Law Review, and a member of Stetson’s Jessup Moot Court Team. She graduated from the University of North Carolina at Chapel Hill in 2010 with majors in History and Political Science. Carly’s email is Carly@gassmanpa.com.

Jonathan DeSantis is in his final year at Stetson University College of Law. Originally hailing from Philadelphia, Jonathan received a B.A., with honors, in Criminal Justice from Temple University. Jonathan serves as a Senior Associate on the Stetson Law Review and is the immediate past president of the American Constitution Society. His email address is Jon@gassmanpa.com.