Law Offices of James W. Mallonee, P.A.
Port Charlotte 941-206-2223
Venice 941-207-2223
Helping individuals & families across Florida with their legal matters since 2005

Can I Lose My Homestead

Could I lose my homestead status if I title my home to my revocable trust?

Possibly

This weeks article will not be covering the property tax implications when you move to a new homestead following the sale of your previous property. That topic will be covered in two weeks. This week’s article spotlights the implications of titling your Homestead property to your revocable trust.

If you and your spouse have ever visited with a trust or real estate attorney, and have asked the question of whether you can place your homestead property into your revocable trust, it is very likely that your attorney strongly suggested that this was a bad idea. The idea that it remains a bad decision still reigns, but has been diminished with a recent ruling from the Federal Bankruptcy and District Courts.

In 2001, a ruling was made in a Federal Bankruptcy Court (Bosonetto case) where the judge in that case ruled that when property is re-titled to a trustee, under Florida’s Constitution, Article X, Section 4, the exemption from forced sale does not apply because the Trustee is not a natural person in accordance with such meaning. On the surface this seems plausible, but what if the Trustee is the same person who was the owner prior to titling the property to the trust. In essence, the physical person who holds title to the property is the same person.

The Bankruptcy Court’s decision made no sense because Florida Courts had long recognized that if the Grantor of the property was the same as the Grantee of the property (except for the title of Trustee), they were considered one and the same. Never-the-less, the Federal Court’s ruling sent shivers through the legal community. Based on this ruling, the standard answer to persons who thought about placing their homestead property into a trust was not to do it for fear of losing its protection from forced sale.

In a recent ruling (Cocke Case) from the same Federal Bankruptcy Court, the court once again ruled that when homestead is placed into a trust and the beneficiaries are the same persons who prepared (called Grantors) the trust, that placing the homestead property into such trust invalidated its exemption from forced sale. The Grantors appealed the bankruptcy decision to the Federal District Court in March of 2007. The District Court overturned the bankruptcy court’s decision and issued a favorable opinion stating in pertinent part that holding properties in a trust have nothing to do with whether the exemption from forced sale is invalidated. The Court went on to state that invalidating the exemption from forced sale turns on the following:

  • Whether the Grantors have a legal or equitable interest in the residence which provides the Grantors with the right to use and possess the residence as a their home;
  • Whether the intention to make the residence their homestead property for purposes of Florida Law (e.g. as a permanent residence and not used as rental property); and,
  • Whether the Grantors maintained the residence as their principal home.

The Court determined that the right of the Grantor’s to revoke the trust and return the property to its previous state gave them the requisite legal and equitable interest in the residence to qualify for the right to use and possess the residence. The Court also reasoned that even though one of the Grantors of the Trust was a minor child (a granddaughter) did not have any effect on invalidating the trust simply because she lacked the capacity to revoke the trust.

It seems fairly clear at this point that the fear that shook the legal community regarding the possibility of losing ones homestead exemption when titling the property to a trustee has been reduced provided you meet the three requirements stated earlier.

However, there are additional reasons why you should consider not placing your homestead property into a trust. One reason consists of Medicaid and estate planning. It is possible that if you title your homestead property into a trust that the asset may be viewed as a countable asset depending on the Medicaid qualification rules in effect at the time of applying for benefits. In addition other concerns are the possible loss of certain property tax benefits to disabled veterans and surviving spouses.

Another reason for not placing your property into a trust as a married couple has to do with marketable title. Suppose you and your spouse own your homestead property together as tenants by the entirety. You both sign a deed conveying the property to a trustee in the name of the trust. Assume also that the trustees are both of you. You continue to live in the property and meet the requirements for homestead exemption as stated earlier. At the death of the first trustee, the property will have to be re-conveyed to the trust because Florida law does not allow homestead property to be devised away from a surviving spouse. Although it seems silly that the beneficiary of the Trust is the surviving spouse, the reality is that the property passes to the surviving Trustee and not the spouse. As a result, when the surviving spouse wishes to sell the property and downsize, they’ll be in shock to learn that they must re-convey the property back to the trust. In essence, the initial titling of the property to the trust will be ignored and the surviving spouse will have to start all over again.

This problem gets even more complicated should the surviving spouse die without re-conveying the property to the trust. In that situation, the initial conveyance to the trust is ignored and the property re-assumes title of tenants by the entirety. The property is then probated through the surviving spouses “pour-over Will” to the trust and then conveyed out according to the direction of the testamentary document. Basically, all that work of titling the property to the trust was in vain.

It should be clear that conveying your homestead property to a trust when both spouses are alive will result in additional expense and effort upon the deaths of the Grantors. As a result, until there is a specific statute that recognizes and fixes this problem, it is suggested that you do not convey your homestead property to a trust until after the death of the first spouse.

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