Do Homesteads Belong in a Living Trust?
Owning a home is a large goal for many Americans, and once home ownership is attained, most want to do everything possible to keep the asset from being lost. Florida’s homestead protection, the law that determines the level of protection the property receives from creditor claims and property taxes, is somewhat unique, in that the creditor protection is unlimited, with a few exceptions. As a result, many homeowners want to increase the legal benefits of this protection by incorporating the homestead into their estate plan. One common feature of many estate plans is the living trust, a document that allows a person to transfer their assets into a form of protected ownership that avoids probate and some additional taxation upon death, while maintaining control over the assets while living because the trust is revocable. Many individuals setting up these arrangements wonder if putting their homestead in a living trust is advisable, and specifically whether it will extend protections beyond those granted in the state constitution. Homestead law in Florida is extremely complicated due to the tricky intersection of state constitutional and statutory laws, as well as previous court decisions, all regulating this area. Having a basic understanding of the main concerns related to putting a homestead in a living trust is key to making an informed decision about estate planning, and a discussion of this issue will follow below.
Generally speaking, a homestead is a person’s primary and principal residence. In practical terms, this means the owner must be a resident of the state, meaning he/she has lived here for at least six months, and spends the majority of the year in the state. Though the analysis of residency can be more complex, this is the basic idea. Beyond residency, the bounds of the property cannot exceed ½ acre if located within a municipality or 160 acres if located outside of a municipality.
Setting Up the Trust
Maintaining the generous homestead protection Florida offers is and should be a key concern in estate planning. To ensure this valuable exemption from creditor claims is preserved, the structure and terms of the trust must comply with certain legal requirements – a key reason to work with an experienced estate planning attorney. A few examples of the necessary provisions to make the transfer valid and enforceable include:
- Complying with Florida law concerning who may inherit when a surviving spouse or minor child exists. Failure threatens to hold the devise invalid and allow the state to determine who should get the property;
- Notifying the mortgage lender of the transfer, and explaining why the “payable on transfer” clause does not apply (property encumbered by mortgages usually require the outstanding balance be paid before the transfer is valid); and
- Including statutory language directly in the trust document about the trustee’s powers to control and manage the property and the status of beneficiaries.
While remote, there is one potential concern those contemplating putting their homestead into a revocable trust should know. A bankruptcy court in 2001 found that putting the homestead into a trust eliminated the homestead protection from creditor claims because it determined the home was no longer owned by a “natural person,” and thus, not a homestead, allowing the bankruptcy trustee to force a sale to pay debts. Every other court that has faced this issue disagreed and left the homestead creditor protection intact by finding the property held by revocable trusts are not subject to forced sale under state homestead laws. There is a small chance the Florida Supreme Court could reverse this trend, which is unlikely, but worth knowing about when formulating an estate plan.
The details of estate planning are the factors that will determine whether it performs as intended, or is forced to take another path to meet legal requirements. William Rambaum knows what is at stake for families, and strives to put together an estate plan that will meet the needs of the creator and his/her heirs for many years. Contact the Oldsmar law firm to schedule an appointment.