Florida Asset Protection Blog

Homestead Protection Not Afforded To House Titled In A Family Partnership

Only individuals can claim homestead protection. The Florida Constitution states that homestead protection applies to "natural persons." I read a case this week wherein a debtor had transferred their homestead property to a family limited partnership for estate planning and estate tax purposes. The debtor owned 95% of the limited partnership interests, and there was a partnership agreement permitted the same debtor to reside in the house. The debtor claimed that the property should qualify as exempt homestead because he had the right to occupy the house under the terms of the partnership agreement. The debtor claimed that he had indirect equitable title to the property, and that his interest was sufficient to warrant homestead protection from his creditors.

The court denied homestead protection. The court recognized that several courts previously protected homestead properties owned in a occupant’s living trust. However, the debtor sets ups a living trust, is the lifetime beneficiary, and has the right to revoke the trust thereby returning property in personal title. In the case of this partnership, the debtor/partner was not the only person creating the partnership (there were other partners), and the debtor did not have the legal right to unilaterally revoke the partnership. The court pointed out that the "natural person" referred to in the Constitution is the legal owner and not the person with rights of occupancy. Other than using a living trust, Florida residents that title their residence in entities such as partnerships, limited liability companies, or irrevocable trusts will not have homestead protection from their creditors.

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

Court Protects Homestead Property Used For Debtor's Commercial Business

Homestead protection applies to homes and land occupied by a debtor as his primary residence. Property used for commercial purposes or for the production of income generally does not qualify for homestead protection. A Florida bankruptcy court recently considered married joint debtors who used part of a homestead property for his residence and part of the same property for business and income production. The issue was whether the partial business use disqualified all or part of the debtors’ homestead protection from their judgment creditors. The two debtors owned a five acre parcel of land in the county. They built their residence on a minority portion of the land. The debtors had two more buildings on the same land. One building was a warehouse used exclusively for the debtors’ business. The third building was a second residence rented to an unrelated third party. In other words, two of the three structures occupying most of the property were used commercially.

The bankruptcy court held that the entire land and all three structures were protected from the debtors’ creditors in his bankruptcy proceeding and were not subject to administration as part of the bankruptcy estate pursuant to the homestead exemption.. The court found that the Constitutional homestead clause does not disqualify a homestead because the owner uses the property commercially or for the production of rental income. The court said that, the "Debtors’ commercial use of the Building (rental) and the Warehouse does not preculd them from claiming the entirety of the Real Property as exempt." The court recognized that other bankruptcy courts reached opposite conclusions in earlier cases. The case is: In re: Earnest, Case No. 08-4408-3F7.

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

Estate Planning Trusts Can Jeopardize Homestead Protection

Asset protection planning is part of estate planning. Tax planning is part of estate planning. Often, however what is good tax planning is not good for asset protection. A recent example is a client who is attempting to reduce their taxable estate by using a estate tax tool called a qualified personal residence trust ("QPRT"). The QPRT is a well-known estate tax reduction technique whereby the taxpayer transfers a residence to a trust and retains use of the residence. After a period of time specified by the trust title to the property passes to the heirs who rent the property back to the former owner and trustmaker. The technique freezes reduces the value of the residence for estate tax purposes. The asset planning issue is that conveyance of a primary residence to a QPRT probably strips the house of homestead protection in Florida. The Florida Constitution protects homestead owned by a natural person. Courts have protected homesteads owned by living trusts where the debtor is the trustmaker, trustee, and beneficiary. A QPRT involves third party beneficiaries and often third party trustees. I do not think a QPRT can own a homestead in Florida.

Nor can the trustmaker remove a residence from a QPRT and back into his individual name for asset protection purposes. QPRTs must be irrevocable to have their intended tax effect. A trustmaker cannot legally withdraw property from an irrevocable trust. Some QPRT trust agreements will have asset protection provisions, such as prohibiting any creditors from asserting an interest in the trust property. Without asset protection provisions in the document a trustmaker’s creditors could attempt to levy on the interest the trustmaker retains in the property. Also, if the trustmaker tries to contribute money to the QPRT to pay the mortgage a creditor could attack the payment as a fraudulent transfer. If the same residence were owned in the trustmaker’s individual name as his homestead the debtor/trustmaker’s reduction of mortgage principal could not be undone under Florida’s fraudulent transfer laws.

If and when you consult with an estate planning attorney make sure the attorney understands your asset protection concerns. Whether estate tax reduction or asset protection planning is of primary importance depends on the individual situation. Be aware that using asset protection tools may not be optimal estate tax planning, and that estate tax tools sometimes reduce asset protection.

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

Homestead Occupancy: What It Takes To Make Land A Homestead

Many of my clients current live in another state and are considering moving to Florida for asset protection purposes. Almost everyone wants to know when homestead protection applies to a new Florida home they will buy. The general answer is that the owner has to actually live in the home as a permanent residence to make the house a Florida homestead. This past week a client posed a question regarding homestead occupancy which required I renew my research on the topic. Its not appropriate to repeat the exact question because my research is incomplete, but in the course of research, I found several cases (some old, some new) which expressed interesting principals about the occupancy of a new Florida homestead.

Here is a sample of principals of homestead occupancy (purposefully omitting case citations or facts):

1. A vacant lot cannot be homestead when the debtor intends to build a house on the lot even when the owner already placed building materials on the lot and has contracted with a builder (a debtor cannot occupy land without a structure thereon);

2. However, a homeowner can protect homestead land by erecting a tent on the lot, and living in the tent while the house is being built. In that case, the debtor prepared the house for occupancy, moved some belongings to the house, but lived in an apartment for a few days before moving in with his family. Living in a mobile home or a barn on the land pending home construction should also qualify;

3. Homestead protection attaches as soon as the owner purchases the house at closing even if he does not sleep in the house immediately thereafter;

4. The debtor does not have to occupy the house at all so long as it is occupied by members of his family as their principal residence. In this case, the debtor had moved out of state for a job and his family remained in the Florida home.

5. Occupancy does not have be to continuous. You can reside elsewhere part of the year, or you can live elsewhere indefinitely as long as you intend that your Florida residence is your primary home. As I have previously stated on this blog, Florida law does not impose a minimum number of days each year for residence in a Florida homestead.

These are just a sample of the many cases on homestead occupancy in order to illustrate that homestead protection is sometimes determined by the debtor’s particular facts.

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

Fraud Exception To Florida Homestead Protection

The Florida Constitution includes three specific exceptions to homestead protection: consensual liens (mortgages); taxes and assessments (homeowners associations) and debts for improvement (mechanics liens). There is an important fourth exception to homestead protection established not in the Constitution but through a history of court decisions. The fourth exception is the "fraud exception." Courts have held that people cannot protect money used to purchase or improve a Florida homestead when the money was obtained by fraud or by breach of a fiduciary duty. Courts use equitable remedies, such as an equitable lien or constructive trust, to pursue the money taken from a fraud victim and put in a Florida homestead.

It is important to distinguish homestead protection from a fraud judgment and the protection of an investment with fraudulent obtained money. The fraud exception to homestead protection applies only when the same money obtained by fraud is used to buy or improve the homestead. The creditor has to trace the money. If Florida resident becomes subject to a civil judgment based on a finding of fraud or breach of fiduciary duty the money judgment based on the fraud count cannot be enforced against the homestead property if the proceeds of the same fraud cannot be traced into the house.

As an example, someone who conducts a ponzi scheme cannot protect the stolen proceeds in a Florida homestead. However, the "bad guy's" homestead is protected from his ponzi victims if the debtor can show that his house was purchased with money other than ponzi proceeds.

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

Homestead Protection For Commercial Property With Upstairs Apartment

The issue is whether you can exempt as homestead a commercial building with an second floor apartment used as your primary residence. A south Florida debtor owned a commercial building in Miami. He operated a adult entertainment club on the first floor. He claimed that he lived in an apartment on the second floor. During the day, when the club was closed, the debtor used the kitchen and the employee showers for personal use. He filed bankruptcy and sought to protect the entire property as homestead. The bankruptcy trustee objected to the exemption. The bankruptcy court overruled the debtor’s exemption of the entire building as homestead and ordered that the trustee sell the property for the benefit of the bankruptcy estate, reserving to the debtor a percentage of the sale proceeds for his extent of personal use.

The court ruled that when a debtor resides in a building used for residential and commercial purpose the appropriate resolution is to sell the entire property and apportion the net proceeds between the homestead and non-homestead portion rather than declare the building to be entirely homestead or entirely non-homestead. Its significant that in the Miami case the entire building was zoned commercial and that the business was open to the public. Therefore, I do not think the result would be the same if a debtor uses a part of a residential property for a home office. The case is In re Darrell Wilson, Case NO. 07-21261 in the Southern District of Florida.

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

Homestead Protection Against Homeowner Association Liens

A caller said he was angry at his homeowners association because it had raised monthly dues to compensate for revenues lost from neighbors who were abandoning their home to foreclosure. He said that he owned his own home free and clear and that he wanted to stop paying his HOA dues in protest against the increased assessments. His wanted to know whether HOA could foreclose on his home to collect dues. The caller told me he assumed that the Constitutional homestead provision protected his home from forced sale initiated by an HOA lien. I told the caller he should pay his HOA dues.

There are exceptions to Florida's homestead protections. One of the exceptions is a consensual (voluntary) lien. A mortgage is an example of a consensual lien. When a homeowner secures the repayment of a loan by giving the lender a mortgage the homeowner has agreed by contract to waive homestead protection. If that were not the case few people in Florida could finance the purchase of their homestead. By law homeowners associations also have consensual liens on houses in their respective subdivisions. An HOA can impose a lien on your property for unpaid dues and assessments. Although the dues and assessments may initially be small the Florida statutes provide the HOA the right to add attorneys fees incurred in the collection of unpaid amounts. Law firms working for HOAs have been known to pile on attorney fees. A relatively small assessment, with fees added, can become a significant lien on your home. If the lien is not paid, the HOA has the right to foreclose the lien just as a bank can foreclose an unpaid mortgage. I explained to the caller that his protest against the HOA dues could cause him to lose his free and clear homestead.

Segregating One Half Acre Within A Municipality As Protected Homestead

Two clients in the past week have owned homestead properties in a municipality on lots greater than ½ acre in size. Both clients were judgment debtors and were asking if there was a way to protect their entire residence under Florida's homestead protection. One situation was particularly interesting. This client owned 3/4 acres within a city on which he build a main house and a guest house. While remodeling the main house, the client and his family temporarily lived in the guest house. Local zoning and land use laws permitted the client to further subdivide the property. The client understood that Florida's homestead law protected two-thirds of his 3/4 acre homestead within the city limits. The client asked if he could convey one-third  of the homestead lot to a family partnership which itself offers some asset protection reserving ½ acres under the homestead umbrella. The client, his spouse, and his children would be partners in the partnership. The client proposed that the land transferred to the new partnership would not include the main house or the guest house.

I told this client that I did not think his solution would work. When a debtor owns more than ½ acre in a municipality the homestead protection is pro-rata as to the entire property. The Constitutional homestead protects a proportion of the total value rather than a proportion of the underlying real estate. In this case, two-thirds of the property value is protected and one-third of the value is not protected. If the debtor conveyed one-third acre to a family partnership, I think a court would hold that two-thirds of the land transferred was an exempt asset and one-third of the transfer pertained to non-exempt assets. A creditor could challenge the transfer as a fraudulent conveyance as to one-third of the value transferred to the partnership. In past bankruptcy court cases the courts have not permitted bankruptcy debtors to carve out a protected ½ acre of land under the homestead protection when the entire parcel inside a city exceeded the allowable ½ acre homestead.

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

Homestead Trivia: Why Florida Protects 160 Acres

The Florida Constitution protects 160 acres of contiguous property used as the debtor's primary residence. Sometimes people ask me why Florida has such a large homestead exemption and what is the signficance of 160 acres. A recent article in the Florida Bar Journal discussed the history of Florida's homestead exemption.  Bar Journal Article. The article traces our homestead exemption to the Armed Occupation Act of 1842 enacted by the U.S. Congress to help attact people to new U.S. territories including Florida. The law set the maximum homestead at a quarter section of land, or 160 acres. You may have learned in school that a section of land is 640 acres. The policy basis of our homestead law is interesting. The homestead provisions are not intended to shield wealthy debtors from their creditors. The Constitutional homestead law comes from the public policy of attacting people of modest means to the new Florida territory and providing them a secure and protected estate which they could farm and could build a secure future for their family.

Resident's Homestead Protection Does Not Protect Property From Creditor of Non-resident Co-Owner

A parent buys a house for their child to live in. The parent borrows the purchase money by giving a bank a second mortgage on the parents’ own homestead property. The child does not have sufficient income or credit to qualify for a purchase money mortgage on the new home. The second mortgage lender insist that the new property be titled jointly in the names of the parents and the child. The parents and child take title as joint tenants with rights of survivorship. The child moves into the new house and files for homestead taxation. The question posed to me this past week is whether the new home is protected from judgment creditors.

The child and the parents each have an undivided legal interest in the child’s residence. The parents own their 50% interest as tenants by the entireties assuming they own their 50% interest jointly and not 25% each. The parents and the child share legal title as tenants in common. A parent and child cannot own property as tenants by the entireties even though they take title as joint tenants with survivorship. The house is protected from the child’s judgment creditors because it is the child’s homestead. The house is protected from a creditor of either the mother or the father because their interest is owned by the entireties. The house is not protected from a joint creditor of the mother and the father because the house is not the parents’ homestead. The child’s homestead protection does not protect the house from the parents’ joint creditor. A joint creditor of the parents’ may be able to force the sale of the house in which case the child would get 50% of the sales proceeds.

posted by Jonthan Alper, asset protection and banrkuptcy attorney, Orlando, Florida