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

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.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

• Email This
• Print
• Comments (1)
• Trackbacks
• Share Link

"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.

The mother will stop using her exempt pension proceeds and social security to pay monthly living expenses. Instead she will use her savings to pay expenses until the money is depleted and hopefully before it is located and garnished. She can use money to make repairs and improvement to her homestead as well as pay her legal bills and taxes.

The unspent pension and social security money can be used to purchase an immediate annuity. Florida statutes exempt from creditors annuities and all annuity distributions. Using pension and social security money to buy an annuity is not a fraudulent conversion because the pension and social security checks are themselves exempt from creditors. When her cash is spent, the debtor mother can revert to living off the pension, social security, and her new annuity.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

The article points out that Florida statutes include a "rental statute" that states that the rental of an entire dwelling constitutes an abandonment of the right of homestead. The authors distinguish the definition of rental from the legal concept of "license". They argue that the rental statute is not triggered when an owner permits a third party to use a homestead pursuant to a license and where no residential tenancy is created. When a property is rented, they state, the lessee has an exclusive right of use and possession for a period of time. Licenses permit use but they are revocable upon short notice and reserve the owner a co-terminus right of entry and possession.

The authors argue that a homestead owner could move away from his homestead and grant a third party a license to use the property without causing legal abandonment pursuant to the rental statute. They suggests using a license agreement that clearly disclaims the creation of a tenancy. Florida residents who want to "rent" their homestead during a temporary absence might consider asking an attorney to draft a license agreement in lieu of a standard residential lease if they are concerned about maintaining homestead creditor protection during their absence.

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

I’ve advised many times in this blog that parents should not add their children to their property titles because a judgment against the child could jeopardize the parents’ assets. This is another example of that risk. However, in this case I think the parents’ house is safe. Because the son has invested no money in the house nor given his parents any consideration for putting his name on the title the son has no equitable interest in the house. He has what is called “bare legal title.” The son has no right to money received from the sale or financing of the house, and his creditors can gain no greater rights than the son holds in the property. I think a judge would recognize that the son is on the title as an estate planning device and that the parents did not intend a present gift of any interest in or rights to the house. The creditors cannot get what the debtor does not have- I think the house is safe.

But, there are many ways this type of planning can turn out badly. There certainly is no guarantee a judge will rule the same way I interpret this transaction. As a practical matter the parents have put their homestead at risk. This family engaged in amateur estate planning without legal advice. Penny wise, pound foolish.
 

 

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida

• Email This
• Print
• Comments
• Trackbacks
• Share Link

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.

 

The second question concerned the bankruptcy rule that requires a bankruptcy debtor to own a homestead property for 40 months in order to get unlimited homestead protection in bankruptcy court. If a debtor owns homestead 1, sells homestead 1 for a profit, invests the profit in homestead 2, and then files bankruptcy, the time of homestead includes ownership of homestead 1. A client posed the following question: the client owned homestead A for many years. During the real estate crash he did a short-sale of homestead A and immediately purchased homestead B with new money. The client believes that since he can continuously owned a Florida homestead, including A and B, for more than 40 months he should have unlimited homestead exemption in homestead B. I don't think the law is intended to add the ownership period of homesteads A and B in this example because no equity from A was invested in B. Ownership periods are grandfathered when the debtor transferred equity (sales proceeds) from one homestead to a new homestead. Investment of money other than homestead sales proceeds begins anew the ownership clock for purposes of the Florida homestead exemption- that's my interpretation.

posted by Jonathan Alper, asset protection and bankruptcy attorney, Orlando, Florida    

• Email This
• Print
• Comments (2)
• Share Link