Excerpt from Chapter 3, Estate Planning and Asset Protection in Florida: A Plan to Survive Unexpected Financial Threats by Barry A. Nelson
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Chapter 3 - Table of Contents
3-1 Introduction
3-2 Abandoning Homestead
3-3 Proceeds from Sale of Homestead
3-4 Effect of Criminal Act, Intentional Tort, or Certain Willful or Reckless Misconduct in Bankruptcy
3-5 Inter Vivos Transfers Resulting in Loss of Homestead Protection
3-6 Status of Homestead Upon Death
3-7 Safest Practice Where No Spouse or Minor Children
Chapter 3 - Florida Homestead - Loss of Homestead Status by Abandonment, Sale, Criminal Acts, Inter Vivos Transfers, and Death
3-1 Introduction
Once homestead is obtained the homeowner needs to consider whether he or she could inadvertently lose homestead status. For example, can a person rent his or her homestead and retain homestead status? This chapter reviews how to avoid the inadvertent loss of homestead.
3-1.1 What are the Greatest Traps for the Loss of Homestead Protection for Asset Protection Purposes After Homestead Status is Established?
Even when all statutory and administrative requirements for homestead protection are satisfied, homestead status may be lost. Homestead status and the benefits associated with homestead may be lost upon the homestead owner’s abandonment of the homestead property, upon the sale even with intent to reinvest in another homestead, upon estate planning transfers, or upon the homestead owner’s death.
3-1.2 What are the Biggest Traps for Professionals Advising on Homestead Issues to Avoid the Loss of Homestead Status for Asset Protection After Homestead Status is Established?
Professionals must be especially careful when advising their clients as it relates to maintaining homestead protection. Many homeowners are surprised that their homes are no longer protected from creditors after the homestead is transferred to non-qualifying trusts, LLCs, partnerships, or other entities for estate tax planning benefits. Care is required to safeguard sales proceeds when homestead is sold with intent to acquire a replacement homestead. If a Will or revocable trust directs that a homestead be sold and the decedent is not survived by a spouse or minor children, asset protection that would otherwise apply if the homestead passed to heirs of the decedent is lost and the sales proceeds become a part of the decedent’s estate for purposes of settling the estate’s claims. Therefore, Florida Wills and revocable trusts should not direct a sale of protected homestead if beneficiaries are children or more remote heirs-at-law of the person creating such Will or revocable trust.
3-2 Abandoning Homestead
3-2.1 Temporary Absence from Homestead-Florida State Law
The general rule is that if a debtor temporarily leaves his home due to financial, health or family reasons it is not considered abandoned homestead for asset protection purposes. Furthermore, the party arguing against homestead has the burden to show that property is not entitled to homestead protection. In one case, the defendants were residing in Costa Rica until the resolution of certain legal issues in the United States. They claimed that they intended to return to Florida and their homestead. The appellate court noted that prior courts had found that “continuous uninterrupted physical presence is not required to create a homestead,” and that “whether there had been an abandonment of a homestead...should be determined by a consideration of all the pertinent facts and circumstances of each case.”[1]
In In re Beebe,[2] the bankruptcy court, in dealing with a case of first impression, held that homestead status is not lost when the debtors leave their home with no intention to return to it but with the good faith intent to reinvest the proceeds of a future sale of the house into a new homestead. The court noted that the following do not necessarily constitute abandonment: (i) mere absence from the homestead for financial reasons, (ii) posting a “for sale” or offering the property for sale, (iii) leaving the property for years and weeds growing on the property. The court stated that abandonment occurs when debtors state the intention to abandon the property and have an intention not to return to it.
In In re Gentry,[3] the debtor did not claim his residence as exempt and instead indicated his intent to surrender the property to the mortgagee. Following the Trustee’s filing of a Notice of Intention to Sell the Property, the debtor amended the bankruptcy petition, indicating intent to retain, not surrender, the property. The Trustee objected to the debtor’s amended claim on the grounds that the debtor could not later claim a homestead exemption following his previous intention to surrender the property. The bankruptcy court sided with the debtor, and, in construing Florida’s homestead exemption liberally, concluded that the debtor’s initial Statement of Intention did not preclude him from later contending that he intended to continue to reside at the property indefinitely.
In In re Cole,[4] the debtor was entitled to the homestead exemption for a house she acquired as a beneficiary under her mother’s living trust. The debtor lived in the home for three years. When the debtor filed for bankruptcy, she listed her interest in the living trust. Following the death of her mother, the debtor amended her schedules and listed her interest in the house and claimed it as exempt homestead since she was living in the property with the intent to live there permanently. As of the petition date, the trustee held the rights of a hypothetical judgment creditor because the hypothetical lien could not attach to the homestead until the debtor acquired an interest in it. The court decided that where a judgment lien and homestead status attach to property at the same time, the homestead exemption defeats the hypothetical judgment lien.
The court distinguished In re Cole from Pasco v. Harley,[5] and First Nat. Bank of Chipley v. Peel,[6] where the Florida Supreme Court held that the homestead exemption must give way to a judgment lien where the judgment lien went into effect before the homeowner became eligible to claim the homestead as exempt. In Harley and Peel, the creditor’s judgment lien attached to the property at issue before the judgment debtor was eligible to claim the homestead. However, that was not the case in Cole. In Cole, although the trustee’s hypothetical judgment lien existed as of the petition date, it could not attach to the property until the debtor acquired an interest in it (i.e., when her mother passed away two weeks after the petition date). Thus, the trustee’s hypothetical lien and the debtor’s homestead exemption attached to the property simultaneously. The conclusion in Cole provides clear guidelines: “When the Debtor acquired the …property under her mother’s living trust, the …judgment lien attached to the property. But the homestead exemption also attached at the same time. In essence it was a tie.”[7] In Milton v. Milton,[8] the Florida Supreme Court held that a tie goes to the heir so the homestead protection was provided notwithstanding the lien.
In the dissolution of marriage context, a debtor was found not to have abandoned her homestead by moving out of her former marital home after dissolution of marriage and moving to a new home with her son when: (i) the older son who resided in the marital residence was involved with drugs, and (ii) debtor stated her intent to use sales proceeds to buy new house.[9]
A debtor was found to have abandoned his Florida homestead and therefore the property lost its protection where the debtor claimed his Naples, Florida residence as homestead. At the time of the bankruptcy filing, the debtor lived in another state for “economic reasons,” listed the new address on his income tax return and established bank accounts in the new state. Prior to filing the bankruptcy petition, the debtor had (i) contracted to sell the residence, and (ii) executed a warranty deed 4 days before the bankruptcy filing which was recorded 7 days after the filing.[10]
In In re Lloyd,[11] the debtor owned real property in Key West and lived in a permanently affixed mobile home on the property with her two children. The debtor moved herself and her children to California to be with her boyfriend. While in California, the debtor (i) enrolled her children in school, (ii) registered to vote, (iii) obtained a California driver’s license and (iv) obtained a job. When the debtor’s relationship with her boyfriend ended, the debtor remained in California, living with her mother. The debtor rented her Florida property through a rental company for a one year lease. Two years after moving to California the debtor filed for bankruptcy claiming the Florida property exempt as homestead. The debtor had listed the Florida address as her permanent residence for her tax returns and insurance, and she stated that she always intended to return to Florida. The debtor made numerous trips to Florida to check on the property and make repairs. The debtor maintained a Florida driver’s license and Florida voter’s registration card. The court stated that:
Although she moved to California to pursue a romantic relationship, the debtor never did establish a permanent residence in California. When the relationship ended, the debtor moved in with her mother and thereafter with friends. She is now living with her family in a rented duplex on a month to month basis…[A] ‘temporary absence of an owner for reasons of health, business or recreation from his residence and the temporary rental of his home during the absence do not necessarily demonstrate an intent to abandon the premises’…This debtor has not established a ‘domicile’ at some other place, to the exclusion of the Key West Property…The Court does not believe that the evidence proves the debtor intended to abandon the Key West Property and forsake the Florida homestead for one in California.[12]
By balancing the facts, the court determined that she had not abandoned the Florida homestead property and was entitled to the homestead exemption.
Footnotes
[1] See Novoa v. Amerisource Corp., 860 So.2d 506 (Fla.3d DCA 2003), quoting Miller v. West Palm Beach Atlantic Nat. Bank, 142 Fla. 22, 194 So.230 (1940). However, see Chapter 4, Section 4-2.8 for loss of homestead qualification for property tax purposes where the homestead is rented for more than 30 days a year for two consecutive years or where the rented homestead is not occupied by the owner on January 1 of any year.[2] 224 B.R. 817 (Bankr. N.D. Fla. 1998).
[3]459 B.R. 861 (Bankr. M.D. Fla. 2011).
[4] 559 B.R. 919 (Bankr. M.D. Fla. 2016).
[5] 73 Fla. 819, 75 So. 30 (Fla. 1917).
[6] 107 Fla. 143, 145 So. 177 (Fla. 1932).
[7] 559 B.R. at 923.
[8] 58 So.718 (Fla. 1912).
[9] See In re Harrison, 236 B.R. 788 (Bankr. M.D. Fla. 1999).
[10] See In re Klaiber, 265 B.R. 290 (Bankr. M.D. Fla. 2001).
[11] 394 B.R. 605 (Bankr. S.D. Fla. 2008).
[12] Id. at 611.
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