The Trials, Tribulations, and Traps of Estate Planing With Florida Homestead Property
The State of Florida grants its homesteaders certain benefits and protections. First, under Florida Statute 196.031, an exemption of up to $50,000 off the assessed value of homestead property from real estate taxes is granted to homestead property owners for annual real estate tax purposes. Secondly, Florida homesteaders are protected from sharp increases in their real estate tax bills by limiting such increases to 3% annually through what is commonly referred to as the “Save Our Homes Cap“- an amendment to the Florida Constitution.
This benefit was most appreciated when property values were, at least on paper, appreciating annually at double digit rates. Third, and the most significant protection, is that t he State of Florida grants homestead property full protection from a forced sale by general creditors which can arise either in a bankruptcy or from an independent judgement against the owner of the homestead property (under Article X, Section 4 of the Florida Constitution). In other words, if you declare bankruptcy or you have a judgement entered against you, your home and whatever equity you may have in your home will be protected.
In addition to these protections and benefits, however, the Florida Constitution also places certain restrictions on a homestead owner which need to be considered in the estate planning process and when entering into a marriage. Such restrictions are often not only unknown or misunderstood by the general public, but also by many attorneys that prepare Wills and Trusts as a part of their practice. This article primarily focuses on the issues of lifetime transfers of homestead, devising homestead at death through a Will or Revocable Trust, and the newly sanctioned Homestead Trust. Issues relating to the kinds of property that can constitute a homestead is beyond the scope of this article.
The Restrictions- If a Florida homesteader (hereinafter “FH” and referred to in the masculine) is married and/or has minor children, he will not be able to freely transfer his homestead property in certain circumstances..
Restrictions During Lifetime- If FH is married, he may not sell, gift, or otherwise transfer his homestead property unless his wife consents by joining on the deed of transfer However, a prenuptial or postnuptial agreement in which rights to homestead are waived could require the spouse to comply with a request to do so. If FH is unmarried and has minor children, he may sell, mortgage, or otherwise transfer his property without restrictions. Understanding these two points is key to understanding how estate planners might address the potential problems that can arise due to the restrictions that apply with respect to transfers at death discussed below.
Restrictions At Death-
1. Married With Minor Children- If FH is married and has minor children, he may not devise his homestead property to anyone. Despite the terms of his Will or Revocable Trust, his spouse will automatically (under the Florida Constitution) receive a life estate, and his lineal descendants, per stirpes (typically his children whether minors or not) will receive an equal share of the remainder interest upon the death of the surviving spouse. A recent change in the law enacted by the Florida legislature gives the surviving spouse an option to elect a 50% interest, as tenants in common with the lineal descendants. Thus, it is easy to see how these results might be totally undesirable if FH dies with minor children.
2. Married With No Minor Children- If FH is married and has no minor children, he may only devise his homestead to his wife outright if his wife survives him. Providing for his spouse by a life interest in a trust such as a credit shelter or marital trust is not sufficient unless FH’s wife has waived such rights under a valid pre or post-nuptial agreement or by a valid waiver as set forth under Florida Statute 732.702. The word “valid” is stressed because most title companies will require that the validity of the agreement or waiver be determined in a Petition to Determine Homestead upon FH’s death if he is survived by his spouse. This restriction on devise of homestead property appears to be consistent with the lifetime restrictions that would prohibit FH from selling or mortgaging his homestead property without his spouse’s consent and joinder. Obviously, the intent of these restrictions is to protect a spouse from having her home taken away or diminished without such spouse’s approval.
If FH does not devise his homestead property to his spouse and his spouse has not properly waived her rights, a devise in a Will or Revocable Trust will be deemed to have failed and the Florida Constitution overrides the terms in such documents by granting the surviving spouse a life estate and granting FH’s lineal descendant’s, (on a per stirpes basis) the remainder. The surviving spouse may also elect a 50% interest as tenants in common with the lineal descendants, as discussed above. This result can be unfortunate in cases where other people besides FH’s lineal descendent’s are intended to benefit or where FH did not intend to have his lineal descendants receive equal shares, or intended them to receive their share in trust. Furthermore, having the property owned by a group of people, some who may be minors, can obviously be problematic.
3. Unmarried With Minor Children- Finally, if FH has minor children, he may not devise his homestead at all. If FH dies with minor children, his homestead will pass to his lineal descendants (on a per stirpes basis) to his lineal descendants.
Tenancy by the Entireties-FH could transfer his property so that it is held jointly with his spouse as tenants by the entirety. This would eliminate the concern of probate if he is survived by his wife and also prevent the property from being owned by a group of people as described above. However, such a transfer might defeat other objectives such as the utilization of FH’s estate tax exemption by a disposition to what is commonly referred to as a “credit shelter trust”. Likewise, if this is a second marriage, FH, may not want to leave his homestead to his spouse outright because she would then be free to leave the property to whoever she wishes at her death. Note- If the new estate tax portability rules which became effective in 2011 become permanent, the former concern of utilizing FH’s tax exemptions may be diminished.
Bequest in Will or Trust to Spouse Where Spouse Could Disclaim- If placing the property in joint names is not a desirable choice because of the estate tax planning issue discussed above or because his spouse is not a US citizen (a discussion of the citizenship issues is beyond the scope of this article), FH can leave a bequest in his Will or Revocable Trust to his spouse. FH’s spouse could then disclaim such bequest within nine months of FH’s death under Section 2518 of the Internal Revenue Code. If the bequest is disclaimed, the Will or Trust could provide that the property passes to a credit shelter trust or to others persons outright or in trust. One downside to this approach is that the spouse can not be given a power of appointment in the credit shelter trust (at least as it applies to such disclaimed property). When utilizing this approach, the estate planner may consider the insertion of some cautionary language into the Will or Trust to help ensure that the surviving spouse will at least consider making a timely disclaimer. This approach can work well, particularly in a good first marriage. If it is determined that FH’s homestead property is not needed or desired to utilize FH’s estate tax exemption, FH’s spouse can accept the devise and forego making the disclaimer. Another possible downside to this approach is that if a disclaimer is desirable, the surviving spouse could fail to make the disclaimer within the required period if she is not properly and timely advised to do so.
Nuptial Agreements and Waivers- The devise and disclaimer route may not be desirable for several reasons. For non-tax reasons, FH may not want to give the property outright to his spouse. On the other hand, it may not be desirable to forego giving FH’s spouse a power of appointment as to such property if it is disclaimed into a credit shelter trust. The only remaining route besides outliving FH’s spouse is having FH and his spouse enter into post-nuptial agreement or otherwise waive her homestead rights under the aforementioned statute. Note- if FH is concerned that FH’s spouse might later challenge the waiver on the basis that there was not a full disclosure of assets or because she was not represented by independent counsel, the post-nuptial agreement is the suggested approach. Furthermore, the waiver statute is rather vague. It does not provide a proscribed form for making a waiver nor does it detail the manner, timing, and content for the waiver.
The New Homestead Trust- In 2010, the Florida legislature enacted Florida Statute 732.4017 which sets forth a path where FH, whether married or not, could transfer a remainder interest in his homestead property to an irrevocable trust providing for the disposition of homestead property upon the death of the homesteader in a manner desired by FH, provided that the trust meets certain requirements. If FH is married, his wife would have to consent by joining on the deed of transfer to the trust. This statute and the approach of transferring the property to a “Homestead Trust” to avoid the pitfalls discussed above is consistent with FH’s powers to transfer homestead property by gift or sale during his lifetime. The Homestead Trust must be carefully drafted to avoid unintended gift tax and/or income tax consequences. Also, if there is a mortgage on the homestead property, documentary tax could be payable on the value of the mortgage deemed to be transferred; and depending on the size of the mortgage, this tax could be substantial. Finally, as the primary reason for using these trusts is to prevent an unintended disposition of the homestead property if FH dies while having minor children, two local practitioners that have been bold enough to share their sample documents at a local annual conference provide for a return of the property to FH after the youngest child has reached the age of majority.
Creditor Protection and Holding Homestead in Revocable Trusts - As discussed above, homestead property is generally sheltered from creditors in either a bankruptcy proceeding or from a forced sale. Estate planning attorneys have commonly recommended that their client’s homestead property be transferred by deed from the client’s individual name to the client’s Revocable Trust for the purpose of avoiding probate at the death of the homestead owner. For a brief period, a Middle District of Florida Bankruptcy case cast a doubt on whether or not it is a good idea to do so. In the case of In re Bosenetto the court denied homestead protection to a debtor who owned their homestead property in a Revocable Trust because the court found the property was not owned by a “natural person” stating that homestead protection is only granted to natural persons under the Florida Constitution. Most estate planners found this to be an absurd decision. Recent cases including, the subsequent Middle District of Florida Bankruptcy case of In Re Merry Alexander, seem to have laid this concern to rest.