By Molly Carey., Esq. People move to Florida for many reasons. Blue skies, endless sunshine, beaches that abound, zero income and inheritance taxes, and for some, the Florida Homestead Exemption, come to mind. Indeed, the Florida Constitution’s Homestead Provision is undoubtedly one of the most robust in the Nation. From the commonly known protection against creditor judgments, to the lesser understood restrictions on devise, this post is the first in a two-part series that delves into the intricacies that lie within Article X, Section 4 of the Florida Constitution and its respective statutory counterparts. It further discusses the estate planning considerations that cannot be ignored given the complexities innate to the Florida Homestead Exemption. CREDITOR PROTECTION
Firstly, what is the Homestead Exemption, and why is it so appealing to homeowners, both Florida and prospective Florida residents alike? The appeal is largely due to the vast protection that the below language in Article X, Section 4 of The Florida Constitution provides to homeowners from creditors. In pertinent part, section 4(a)(1) states - SECTION 4. Homestead; exemptions.-- (a) There shall be exempt from forced sale under process of any court, and no judgment, decree or execution shall be a lien thereon, except for the payment of taxes and assessments thereon, obligations contracted for the purchase, improvement or repair thereof, or obligations contracted for house, field or other labor performed on the realty, the following property owned by a natural person: (1) a homestead, if located outside a municipality, to the extent of one hundred sixty acres of contiguous land and improvements thereon, which shall not be reduced without the owner’s consent by reason of subsequent inclusion in a municipality; or if located within a municipality, to the extent of one-half acre of contiguous land, upon which the exemption shall be limited to the residence of the owner or the owner’s family; This means that a creditor cannot place a lien on, or force the sale of one’s principal residence that comprises up to ½ acre within city limits, or 160 acres if outside city limits. Further, there is no cap on the dollar amount of this protection. To explain, hypothetical Florida residents Sally and Joe own a $10 million dollar home on Star Island in Miami Beach situated on a ¼ acre, and have a $10 million dollar judgment entered against them due to default on a business loan they personally guaranteed. So long as this home is their principal residence, not one penny can be collected through its forced sale, even though doing so would satisfy the judgment in full. If their $10 million dollar home was located in Ocala, Florida, situated on 3 acres within city limits, their homestead exemption only covers 1/6th of that, a ½ acre. The outcome here would be very different for Sally and Joe because their creditor could legally force a sale and collect a dollar amount proportional to the value of the realty over the protected ½ acre. The result being that a substantial part of the sale proceeds are used to satisfy a portion of the judgment. What if Sally and Joe have other significant assets they want to preclude their creditor from seizing to satisfy its judgment? They could use their protected homestead to shield these assets by funding the improvement of their homestead property, for instance, by remodeling it, or even by paying down the debt on it. So long as the funds were not procured fraudulently, pouring them into their protected principal residence to improve it or pay down the mortgage, is not considered fraudulent in and of itself, or an attempt to defraud their creditor. LIMITATIONS There are liens however, from which Florida Homestead law does not shield a Florida resident. Mechanic liens for goods and services to build, improve and repair the Florida homestead are one of them; as are property, state and federal tax liens, assessment liens, and mortgages. Here, if the contractors Sally and Joe employed sue, due to nonpayment, they very well could get a money judgment and execute upon it through the forced sale of the homestead property they worked to improve. If the contractor did not want to force the sale, as is often the case, the lien would cloud title on any eventual sale of the property. It would have to be paid out of the proceeds to Sally and Joe to result in a clear and marketable title. Similarly, a lien that is an exception to the Florida Homestead Exemption will be a valid lien upon a resident-decedent’s realty that constitutes a protected homestead at date of death. The homestead's protected status is retained even after death, provided the facts support such a determination. In Florida, a resident must demonstrate an intent to maintain the home as his or her primary residence, reside on the property and own or have a beneficial interest in it. There are various factors considered to evidence this intent. Upon entry of a Court’s Order Determining Homestead Status of Real Property, heirs take the property unencumbered by any liens that Article X Section 4 protects against, but subject to those that are excepted, namely mechanic liens, property, state and federal tax liens, assessment liens, and mortgages. In the fortunate case of Sally and Joe, provided an Order of Determining Homestead is warranted and entered upon the survivor’s death, their ¼ acre $10 million dollar Star Island homestead descends to their heirs fully protected, free and clear of the $10 million dollar judgment. Had the property been subject to a mortgage or a mechanics lien, those creditors would have to be paid through the sale of the property. Exactly how homestead property descends is governed by Article X, Section 4(b) and (c) of The Florida Constitution and the Florida Probate Code. Strict adherence is required, and a resident cannot devise contrary to what the Florida Constitution and statutes require. Further discussion on transfer restrictions is the subject of part 2 of this post. ESTATE PLANNING CONSIDERATIONS Given the vast creditor protection the Florida Homestead Exemption provides a Florida resident, it’s important that one understand what not to do to compromise this shield from an estate planning perspective. Specifically, how one holds title to their homestead is key. In keeping with Sally and Joe’s hypothetical spectacular Star Island homestead, let’s assume they set up a joint living revocable trust. They then deeded their home to Sally and Joe as Trustees of The Sally and Joe Joint Revocable Living Trust Dated January 1, 2020. The Florida Constitution requires the homestead to be “owned by a natural person”. Fortunately, the case law is now clear that transferring title to one’s revocable living trust over which complete control is maintained does not compromise the protected homestead status on a principal residence. Sally and Joe’s transfer and use of this advantageous estate planning vehicle to avoid probate is effective, although in Florida there are simpler ways to take one’s home out of the probate estate without compromising a homestead exemption. While the property would not lose its homestead character in this scenario, the death of the settlor may require certain limited probate proceedings to determine who may be entitled to the homestead property upon the settlor’s death. If Sally and Joe did not have a living revocable trust and did not already own the house as husband and wife as tenants the entirety, then they should execute a deed that contains this language. Doing so ensures the passing of the title of the homestead property to the survivor upon death of the first spouse, without the need for probate. Another option they have is to execute a lady bird deed, either jointly or by the surviving spouse that includes a provision that preserves the homestead. Doing so will allow either Sally or Joe as the surviving spouse to retain a life estate with full control, use, and enjoyment during his or her life, but ownership will transfer to the named remainderman on the deed without the need for probate. Here too, the constitutionally protected homestead status is retained even after death of the owner/life tenant. However, liens not protected against will attach and require payment whether against the deceased owner/life tenant, or remainderman/beneficiaries after death of the life tenant. For instance, if one of the children named as a beneficiary on a lady bird deed has an IRS tax lien against him, that lien will have to be paid to obtain clear and marketable title. Again, careful consideration must be given before execution of a lady bird deed or any other deed transfer of one’s homestead because there are strict limitations on devise when the owner is married and/or there are minor children involved. There are certain actions that Sally and Joe certainly would not want to take if protecting their homestead from creditors is important to them. For instance, they should not transfer their interest to a LLC even if they are the sole owners of it. Similarly, they should not transfer their interest to an irrevocable trust. Doing so constitutes the transfer to legal entities that are not considered to be owned by a natural person, and doing so strips their homestead of its constitutionally protected status. Last but certainly not least, Sally and Joe should not transfer title to themselves as tenants with rights of survivorship with an adult child that does not reside with them. This might make sense upon cursory review because it will effectively avoid probate. However, a creditor with a judgment against this child can enforce its judgment against the child’s interest through forced sale of the homestead property. The proceeds of the sale would be allocated between the creditor and Sally and Joe, and their Star Island homestead would be lost. Stay tuned for part two to learn what transfers are permissible and which are restricted when it comes to one’s Florida homestead. Comments are closed.
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