A common question often asked, and one that actually been the subject of some question within the Florida legal community, is whether a Florida Homestead should be titled into a Florida revocable living trust?
When we talk about homestead protection in this setting, we are not talking about the tax exemption status offered by the county of residence. Rather homestead protection in this context refers to the protection against creditor attachment or protection against liens and/or judgments filed against the homestead by a creditor of the homeowner.
Titling a Florida Homestead in a Living Trust [Pros and Cons]
Florida has a well earned reputation for its exceptionally strong, unique homestead protection offered under the Florida Constitution. When a Florida residence qualifies as a “homestead,” it can’t be attached (i.e., sold or liened to satisfy a debt) by most creditors. And, in bankruptcy, a trustee can’t liquidate a protected homestead to satisfy creditor claims.
Florida’s Unique Homestead Protection
Most states place a cap on homestead exemptions—with allowable exemption amounts ranging from as little as $5,000 in Virginia to as much as $500,000 in Massachusetts. These exemption caps render any surplus value in a residence vulnerable to creditor claims. In Florida, though, there is no limit on the value of real estate that can be protected as a homestead.
Florida is unique in offering 100% homestead protection provided the real property meets the requirements of 1/2 acre within a municipality or not more than 160 acres outside of a municipality.
The unlimited Florida homestead exemption acts as a powerful shield, allowing the most valuable asset owned by most Florida homeowners to survive a bankruptcy filing and serve as a foundational asset for re-building wealth after discharge.
Defining a Florida Resident
To be a “homestead,” residential real estate in Florida must be owned by a Florida resident who uses the property as his or her primary residence. This means that one would need to be a Florida resident in order to claim a Florida homestead. A Florida resident is defined as someone who lives (is present) in Florida for at least 6 months and 1 day of the calendar year. The idea is that the person spends the “majority” of his/her time in Florida during the year. And, critically, the owner of the property must be a “natural person.” A corporation, LLC, or irrevocable trust cannot claim homestead protection.
With an established Florida residency, the next question is how to determine a Florida homestead. From this question springs the subject of this article, of whether you can title your Florida homestead in a revocable living trust in Florida.
Advantages of Using a Living Trust
A living trust is set up while the grantor is still alive (hence, “living”) and frequently holds a substantial portion of the grantor’s assets. In many cases, the grantor names him or herself as trustee and is also the trust’s beneficiary. Within the instrument creating the trust, the grantor designates a successor trustee to take over administration upon the grantor’s death. And the grantor leaves precise instructions as to how the successor trustee will eventually distribute the assets held in the trust.
Living trusts have become a popular estate-planning tool due to the flexibility and efficiency they offer when arranging distribution of assets. Because they can accomplish many of the distribution objectives traditionally associated with wills, living trusts in Florida are often described as a “will substitute.” It’s important to remember, though, that a living trust doesn’t necessarily have to be used instead of a will, as the two instruments can just as easily be used in conjunction—each complementing the other.
A well-constructed living trust allows the grantor more precise and enduring control over the disposition of trust assets than what can ordinarily be accomplished through a will. The most commonly cited benefit, though, is that a living trust allows property within the trust to pass to beneficiaries outside of the probate process that applies to assets devised by will. Because probate is quite-often a burdensome, expensive, and lengthy undertaking, probate avoidance is a significant advantage.
Reasons to Hold a Homestead in Florida Living Trust
Because a residence held in a living trust can still be a protected homestead, estate-planning homeowners frequently ask whether transferring a homestead into a living trust is in fact a wise idea. As is so often the case, the answer depends upon the individual homeowner’s specific situation.
In general, you might want to hold a homesteaded property within a living trust because you get the benefits of both. The property sidesteps probate because it passes to your heirs (i.e., the trust’s successor beneficiaries) through the trust. If you want to place long-term limitations on how the residence can be used or transferred by beneficiaries, a living trust can be structured so that title to the property transfers into a more specialized trust after your death. All the while, you continue enjoying the powerful asset-protection benefits of Florida’s homestead laws.
There are also plenty of individualized scenarios in which a living trust makes sense for a homestead. For instance, let’s say a married couple, each of whom has adult children from a prior marriage, purchases a residential property they intend to use as a homestead for the rest of their lives. By default, Florida law assumes that the property is owned by the couple as tenants by the entireties, which means that when one spouse dies, the other automatically takes full title to the real estate. Then, when the second spouse passes away, the homestead descends to the second spouse’s heirs.
This scenario raises a potential problem if the spouse who died first wanted his or her children to inherit an interest in the property—because that won’t happen when real estate is held in tenancy by the entireties unless the second spouse bequeaths an interest to the stepchildren. To avoid an unintentional (or intentional) disinheritance, the spouses could, during life, transfer the homestead into a living trust naming them both as beneficiaries.
Downsides to Holding a Homestead in a Living Trust
Conversely, there are similar scenarios in which it would make more sense not to transfer a homestead into a living trust. In Florida, interests in a homesteaded property are “devise-restricted” if the owner is survived by a spouse or minor children. Instead of transferring via will, the interest descends according to statute. The intricacies of how the statutory system of descent works in different situations gets a little complicated. But the bottom line is that, when a homestead owner is married and has children from a prior relationship, both the surviving spouse and the children are assumed to receive an interest in the homestead.
But that might not be what you want to happen. So, rather than a surviving spouse splitting a property interest with the decedent spouse’s children, you might prefer to keep things simple and own the property as tenants by the entireties. Due to the “right of survivorship” inherent in tenancy by the entireties, whichever spouse lives longer automatically takes full title, and you don’t have to worry about the statutory distribution scheme. Of course, the surviving spouse can still transfer the homestead into a living trust later so that the property descends outside probate.
Ideally, the couple will have made arrangements in advance— with the assistance of experienced estate-planning counsel—so that their mutual intentions for the homestead property are clearly spelled out in a writing that protects the interests of both spouses and their respective heirs.
Homesteads in Florida Probate
As mentioned above, one of the chief benefits of using a living trust is that it allows assets in the trust to avoid probate. As it turns out, though, the Florida probate process for homesteads is usually relatively painless. A property subject to homestead protection is not considered to be formally within a decedent’s probate estate because, as a homestead, it’s not subject to creditor claims. Instead, the personal representative files a Petition for Determination of Homestead asking the probate court to find that the property qualifies as a homestead. Once the finding is made, the property is transferred to the appropriate heirs, with the homestead protection intact.
There are some scenarios in which holding a homestead in a living trust could still make sense. But, because of Florida’s expedited probate for homesteads, probate avoidance is less of a factor. An experienced Florida estate-planning attorney can help you decide whether transferring your home into a living trust is a wise decision in your situation.
However, Florida courts have held that a primary residence held in a revocable living trust can be eligible for homestead protection. If the beneficiary of a living trust could claim the exemption if his or her name were on the deed, the property is effectively a homestead.
Whether to Title a Florida Homestead in a Florida Living Trust Has Been Questioned Due to an Early by the Bankruptcy Court Ruling in this District.
Without diving into too much legalese, there was a decision by a bankruptcy court judge in a case called In re Bosonetto, Bk. Ct., M. Dist. Fla. In that case, the judge found that because the homestead in that case was held by a trust and not a “natural person”, the homestead protection did not apply, and the court ruled that Florida’s Homestead Act does not protect a primary residence held within a living trust. On this basis, the court allowed a creditor to force the sale of the home in order to pay debts.
That being the case, it is also also worth noting that the weight of legal authority holds that a homestead held in a living trust remains protected from creditor claims. And, on this basis, 5 Florida courts (2 of which were bankruptcy judges) have opted NOT to follow that case, and have expressly determined that property held in a revocable living trust is exempt from forced sale under Florida homestead laws. But it is possible, albeit unlikely, that the Florida Supreme Court could in the future decline to apply homestead protections to residential real estate held in a living trust.
For you legal researcher types, the cases to review are as follows:
|Callava v. Feinberg|
|Engelke v. Estate of Engelke|
|In Re Alexander|
|In Re Edwards|
|Cutler v. Cutler|
Making an Informed Decision
[Whether to Title your Homestead in a Revocable Trust]
The important thing to understand when making this decision, in light of the legal insight discussed in this article, are the pros and cons of titling your homestead in your revocable living trust.
|Revocable Trust Titling Pros||Revocable Trust Titling Cons|
|Avoid Probate Administration||Florida Supreme Court Question|
|Flexible Distribution Plan||Potential Decreased Asset Protection|
Summarizing the pros and cons, it is often very advantageous to title a Florida homestead in a revocable trust due to the major benefit of avoiding the Florida probate administration process in favor of a much simpler Florida trust administration. In addition, the flexibility of a revocable trust allows distribution planning options in the event of a special needs beneficiary in Florida OR if added protection is needed for IRA beneficiaries, estate planning in Florida for second marriages, and the list goes on.
However, when weighing pros and cons, those in high risk professions such as doctors OR contractors might consider opting to leave the homestead out of the revocable trust as an extra precaution as part of a coherent Florida asset protection plan.
Is there much of a chance that the Florida Supreme Court could overturn the decisions in favor of the Florida homestead and revocable trusts. It wouldn’t seem likely to this lawyer due to the court’s general understanding that a revocable trust is not really a separate entity from the trustmaker who is also the original owner of the homestead. Still, because we’re speculating, it is important to have all the facts and make an informed decision.
As a side note…you need to be sure to understand the difference between revocable and irrevocable trusts in Florida because homestead protection is NOT available for property in an irrevocable trust.
Another legal nugget…recent Florida legislation also allows a homestead to be afforded full protection if held in a Florida land trust.
Finally, it is very important to understand the spousal rules around the Florida homestead in order plan accordingly.
So, if your Florida homestead is not in your Florida revocable living trust you should have your Florida estate plan reviewed as part of a regular estate planning checkup by your favorite Florida estate planning attorney.
Steve Gibbs, Esq.
This is an updated version of a prior post published in 2015.