Florida Asset Protection : Asset Protection Law & Planning in Florida - Florida Homestead Exemption

 Some of my out of state clients want claim Florida residency to protect assets, but they really do not want to move to Florida. Some married debtors ask whether they can invest in a Florida property and claim the property as their homestead while their non-debtor spouse remain in their family home in another state. Can a debtor and his non-debtor spouse have separate homesteads?

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One of my clients owns a small 1/4 lot within a municipality. There are two separate residential buildings on this small lot. The client and his family live in one building. The client leases the second building to tenant who is not a family member. The client asks me if the entire property is exempt homestead.

The issue is whether the debtor’s lease and collection of income from the second building converts part of the property to a business property rather than a residential homestead. There have been several cases over many years which have addressed this issue. I understand that under  the current law, as interpreted by the Florida Supreme Court, makes a distinction between leasing part of a homestead located inside a city and leasing part of a homestead in the county.

 

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A woman client  asked me the following question about homestead protection. Her husband purchased a homestead property prior to their marriage. The house was titled in the husband’s name. The husband was convicted of a white collar crime and sent to prison. The husband and wife had substantial joint debts, including some civil judgments, which the client  could not pay without the husband’s income. The client wanted to know if their creditors could put a lien on their house once the husband was incarcerated and no longer living in his homestead.

Courts have interpreted the constitutional homestead exemption to protect the homestead owner and his family. One of the policies underlying the homestead exemption is ensuring that a debtor’s dependents are not forced out of the family home. Also, a debtor loses homestead protection if he voluntarily abandons the homestead property Courts have stated that criminal incarceration is not a voluntary abandonment of homestead as long as the debtor intends to reoccupy the house at the end of his prison sentence.

I advised the client that I did not think the joint creditors could force the sale of, or place an enforceable lien upon, the homestead while her husband was in prison.
 

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One of my asset protection clients owns two adjoining properties in the count. He built his residence on one property which is subject to a mortgage. The mortgage is upside down. He uses the adjoining property to operate a business. He is considering walking away from the home mortgage and letting the house go to foreclosure. He wants to know if a deficiency judgment would attach to the adjoining second property used commercially

Currently, both properties are protected from the client’s judgment creditors under the homestead exemption. First, both properties are part of his 160 acre homestead allowance. Homestead covers up to 160 of contiguous property. The second parcel is part of the homestead because it is contiguous even through it is otherwise identified for title and tax purposes as a distinct parcel.

Debtor’s may use part of their homestead for commercial purposes if the homestead is situated in the county rather than in a municipality. The 160 acre homestead allowance contemplates that debtors located outside of cities may often use part of their land to make a living from ventures such as farming activities which require large land area. Homestead protection is designed to protect the debtor’s family. The large acreage allowance provides the debtor’s family not only a roof but also the land necessary to support the family financially. Commercial use is contemplated, not prohibited for rural homesteads.

If the debtor leases the second property to a third party who then uses the property for a similar business there debtor would lose homestead protection. There is a difference between the debtor conducting his own business, on one hand, and on the other, leasing the property for income.

 

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A Florida court issued a decision upholding a California court’s power to force a Florida debtor to convey title to his homestead property to a receiver on behalf of a creditor.

A simplified version of the facts are as follows.  The debtor is an elderly widow. Her deceased husband had been appointment trustee of a family trust. The husband stole money from the trust and bought a house in California. Subsequently, the husband’s first wife died and the husband married the debtor. The husband died. The surviving spouse, the debtor, sold the California house and bought a Florida homestead. The debtor was not a party to and had no knowledge of her husband’s theft of trust assets which occurred prior to the marriage.

The trust beneficiaries sued for the husband’s breach of fiduciary duty. The California court issued an order imposing a “constructive trust” on the Florida homestead which had been purchased with the proceeds of the husband’s wrongdoing. The California court issued an injunction against the debtor requiring her to convey her Florida homestead to a receiver acting on behalf of the trust’s beneficiaries. When the beneficiaries tried to enforce the California order in a Florida court the debtor said that a California court could not force her to convey her homestead.

 

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A Florida debtor can protect his primary residence  from creditors so long as either the debtor has an ownership interest in the property and either the debtor or the debtor’s family resides in the property as their principal residence. Even if the debtor moves to a new residence his former residence  is still protected  from his creditors under the Constitutional homestead provision  if a member of his family continues living in the house.

This principal is explained in a recent decision of a Florida appeals court. In this case, a man, his wife, and their child  lived in a Florida home. The couple divorced. The divorce settlement required the husband to deed the home to the wife who, together with the child, would live in the home exclusively. The husband moved out but never signed a deed to the wife. A creditor obtained a judgment against the husband only.

The wife died. After her death, the husband deeded the house to their child who was now an adult and still lived in the home. The judgment creditor sought to foreclose its judgment lien on the house. The creditor argued that after the husband/debtor lost his homestead protection when he left the house following the divorce.


 

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Last month a Florida appellate court issued a homestead decision which held that a spouse’s signature on a standard warranty deed conveying title to the couple’s homestead effectively waives the spouse’s post-death homestead rights. The case is important as it touches on a controversial issue of what constitutes a valid waiver of homestead rights in general.

The facts simplified were that a couple jointly owned a house. The spouses both signed a deed conveying title of the homestead to the wife. The wife’s will left a life estate in the house to the husband and a remainder interest (after the husband’s death) to the wife’s sister. The wife died first. After both spouses died the husband’s estate challenged the remainder interest to the wife’s sister on the grounds that absent a waiver of homestead rights by the husband a devise of less than fee simple interest to the sister would be invalid, and that since the wife had no descendants, the homestead should pass outright to Mitchell upon the wife’s death The wife’s estate argued that the husband waived homestead rights when he deeded the property to the wife during their lifetimes.

The court held that the transfer to the wife validly waived the husband’s homestead rights because of technical legal terminology in a standard warranty deed. Specifically, the warranty deed which referred to “all hereditaments” effected a transfer of all interests in the property capable of being inherited. Therefore, the conveyance of all hereditaments to the wife was a waiver of post-death homestead rights.

 

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Often, parents will put their children on titled to their homestead to facilitate title transfer upon the parent’s death as part of “do it yourself” estate plan. Sometimes the parents add children on the title as joint tenants with rights of survivorship. Other parents transfer the title of their residence to their child’s name and reserve a life estate so the parent can remain in the home as long as they are alive. In the latter case, the parent holds the life estate, and the child owns what is known legally as a “remainder interest” in the house, that is, the child owns what “remains” after the life of the parent. A few days ago a clients asked me if his remainder interest in his parents homestead was exempt from the client’s own judgment creditors under Florida’s homestead exemption.

The answer depends upon whether the child/debtor occupies the house with the parent. The Florida Supreme Court held that a creditor’s judgment attaches as a lien to a child’s remainder interest in the parent’s homestead where the child does not live in the house until after the expiration of the parent’s life estate and where the child’s creditor gets a judgment while the parent is alive. The Supreme Court said that a debtor with nothing more than a remainder interest subject to his parent’s life estate lacks the right of possession necessary for the Constitution’s homestead exemption.

 

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Can a debtor protect a future legal interest in his primary residence under Florida homestead laws? In this bankruptcy case a debtor’s mother owned a property where the mother and the debtor resided with the debtor’s spouse and children. The mother executed a deed transferring title to the debtor reserving a life estate to the mother. (A "life estate" means the mother owns and controls the property and as long as she is alive). The debtor’s mother was old with a short life expectancy.

The debtor filed Chapter 7 bankruptcy and claimed his future legal interest in his mother’s house as an exempt homestead asset. The trustee objected to the debtor’s exemption because the debtor’s interest in the property was only a future "remainder interest" (meaning the debtor has no vested ownership until the mother dies). The trustee wanted to take and sell the debtor’s interest in the house which would vest upon his mother’s death in the reasonably near future.

The court said that the debtor’s future ownership rights was protected under Florida’s homestead laws. The court pointed out that the debtor occupied the home with his family as a family residence, and that the debtor contributed financially to the repairs and upgrades to the house. The court held that the debtor’s present right of possession is sufficient to qualify the house as an exempt homestead. In re: Williams Case No. 3:09-586.

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Asset protection planning deals mostly with civil money judgments. When it comes to family law, there are fewer asset protection options available to avoid awards of alimony and support of a former spouse. For example, judges in divorce cases can order an allocation of retirement accounts which are exempt from regular judgment creditors. The homestead exemption is the strongest asset protection tool, but does it work equally well in a family law context. A caller asked me whether a court can force the sale of a former spouse’s homestead property to pay court awarded child support or alimony.

There is at least one case which held that a spouse could force the sale of a homestead to enforce a support order. In that case, the court reasoned that the purpose of the homestead protection is to protect the debtor’s family, and that the debtor cannot hide behind the homestead shield to the detriment of those family members it was designed to protect.

More recent decisions have held that there is no alimony or support exemption to homestead protection. If the creditor spouse can demonstrate that the spouse who owns the homestead property acted fraudulently, reprehensibly, or egregiously to acquire or use the homestead exemption to avoid paying an alimony or support order then the court could impose an equitable lien on the homestead property. However, I think most courts will agree that a former spouse cannot force the sale of homestead to fund an alimony or support obligation.

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"Can I still do asset protection planning after there is a judgment against me?" A very common question. The answer is "yes" in many cases. Here’s an example from last week’s clients of legitimate and effective post-judgment planning.

This elderly lady had guaranteed her son’s business loan which the son could not repay when the business failed. The business and loan was made in another state with a national bank. The bank just got a judgment against mother and son for several hundred thousand dollars. The mother lived in Florida in a home with a $40,000 remaining mortgage. She had about $60,000 savings in accounts at the same bank that got the judgment. She lived primarily off monthly checks from her deceased husband’s pension and social security.

Here are the post-judgment planning steps she is considering. First, she pays off her remaining mortgage leaving her with about $20,000 at the creditor bank. Paying a homestead mortgage cannot be reversed under Florida law. Next, she’ll move the financial account from the creditor bank to a small bank in Florida; she is not "hiding" the money, but she is removing the money from the "creditor’s doorstep." The mother’s litigation attorney can probably delay discovery of new bank accounts for a few months after judgment.

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A Florida homestead, once established, may be abandoned in which event the property’s homestead protection from creditors is lost. There are many Florida court cases which have discussed the tests of whether an owner has "abandoned" their homestead. Temporary absence or a forced absence from a homestead generally is not abandonment. One important abandonment test is whether the homestead owner has rented the house under a long-term lease to a third party. Rental is consistent with abandonment.

Two Florida attorneys wrote an interesting article in the current Florida Bar Journal about rental and homestead abandonment. The authors discussed how renting a homestead affects the owner’s homestead tax deduction. Their article equally is relevant to renting and homestead abandonment for creditor protection.

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An attorney asked me for my opinion about his debtor client who was put on the legal title to his parents’ house. His mother and father added the client, their only son, to their homestead deed as a joint tenant with rights of survivorship for estate planning purposes. When both parents die the title automatically passes to the surviving son. (Title would vest in the son anyway under Florida’s homestead laws without the son being on title.). The parents paid off the mortgage. The son never paid any money toward the purchase or maintenance of the parent’s house. The son does not live in the house with his parents. One of the son’s creditors got a civil judgment against him. The attorney wants to know if the son’s creditors can levy upon the son’s interest in the house and force a sale of the home.

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A client asked me two homestead questions which questions I have previously heard from other clients or email inquiries. This client owned a homestead with significant equity within a municipality. Homestead properties within a city up to ½ acre in lot size are protected under the Florida Constitution. The client said he intended to buy a ½ acre lot adjoining this existing homestead as an investment, and he wanted to know if the lot would be protected from creditors. My opinion is that the lot purchase would jeopardize the homestead protection of his existing house. Homestead includes the property upon which your residence is located as well as all contiguous land. If the client purchased the adjoining lot and took title in his own name the adjoining lot would be incorporated into his homestead and the size of his entire homestead would increase from ½ acre to a full acre. Thereafter, only 50% of the total homestead would be protected within the city limits. The client could not apportion protection to the original lot on which the house is situated. The purchase of the contiguous lot in his own name would forfeit protection of 50% of his house value. A better strategy would be to form a limited liability company and have the LLC purchase the adjoining lot. Because the client does not personally own the new lot it would not add to the size of his homestead. Land owned by entities, as opposed to natural persons, cannot be homestead property. The LLC would give some, although imperfect, asset protection.

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