FLORIDA - A recent bankruptcy court decision points out one of the possible pitfalls of deeding homestead property to a revocable trust.
The recent Bosonetto decision involved a bankruptcy debtor against whom a lawsuit was pending in Michigan. Just prior to a judgment being entered in that lawsuit, she liquidated all of her investments and purchased a home in Florida for $248,000 cash. Title to the property was put in the joint names of her and her daughter. However, two years earlier, she had established a revocable living trust and conveyed all her property to the trust, including interests in future property "even though record ownership or title be registered in my individual name, in which event [such property shall] be deemed held in trust." The bankruptcy court assumed for purposes of this decision that her interest in the Florida home was in trust (although we do not recommend on clients relying on such a “blanket” transfer if they truly do intend for assets to be transferred into trust).
The debtor sought to avail herself of the Florida constitutional provision which states that a homestead is exempt from forced sale, asserting that the creditors in the bankruptcy court could not claim any interest in her home. The bankruptcy court disagreed and, in denying the exemption, held that the homestead creditor's exemption was only available to a "natural person;" and since the debtor's revocable trust was not a "natural person" it could not claim the exemption. It was a very short step from that point to also holding that the transfer for no consideration of an interest in the property to the daughter was a fraudulent conveyance and so the daughter should also not be allowed to claim any exemption.
The Bosonetto decision should come as no surprise because, despite the obvious advantage of avoidance of probate, the possibility of losing their homestead creditors' exemption (and certain other benefits, such as a potential Medicaid exemption) by putting the homestead in trust is real.
For example, Joe died testate in 1988 in Broward County survived by a minor child who was then residing with the decedent's second wife in Dade County. In 1986, Joe executed a revocable trust designating himself as trustee and as lifetime beneficiary of the trust. Upon his death, his home was to be gifted to his adult child by an earlier marriage. The decedent transferred his home to the trust. The court would have to rule that by retention of the complete control of the property with an absolute right to revoke the trust, it was apparent that the testator intended to circumvent the constitutional restriction on testamentary disposition of the homestead while at the same time treating the property as his own during his lifetime.
In concurring opinions, one judge has already raised the question of whether a transfer to an irrevocable trust might be valid. Of course the transfer to an irrevocable trust would be valid. An irrevocable trust is one of the most powerful tools available to insulate one’s property from misfortune by any means.
Total avoidance of probate is a desirable result, but not at the loss of a potentially extremely valuable benefit. Typically, even if the homestead is still owned by a decedent at death, title can be transferred in the course of a summary probate administration, which is far less expensive and far less cumbersome than a formal administration. Bosonetto reinforces the need to be cautious in this area.
It has been suggested that a plausible solution would be to transfer the homestead property to an irrevocable trust in which the person simply retains a life interest in the trust. At the person’s death, the trust asset would pass pursuant to the trust instrument and not according to the homestead laws.
Unfortunately, the person must act at his own peril since there are not many recent cases directly on point. However, based upon analogous cases, it would appear that the irrevocable trust might allow the person to continue to live in the residence and still avoid potential homestead problems.
Generally speaking, the Florida consitution protects homestead property owned by a natural person. But, what happens if a person deeded their homestead to their living trust, and as a result the legal title is held in the name of the trustee for the trust. In the case of Callava v. Feinberg, the Second District Court of Appeals held in October 2003, that homestead protection for creditors applies even if a person’s primary residence is titled in the name of the trustee of a trust, The court stated
“ The constitutional provision "does not designate how title to the property is to be held and it does not limit the estate that must be owned...." Southern Walls, Inc. v. Stilwell Corp., 810 So.2d 566, 569 (Fla. 5th DCA 2002). "[T]he individual claiming homestead exemption need not hold fee simple title to the property." Id. (citing Bessemer Props., Inc. v. Gamble, 158 Fla. 38, 27 So.2d 832 (1946)). See also HCA Gulf Coast Hospital v. Estate of Downing, 594 So.2d 774, 776 (Fla. 1st DCA 1991)(beneficiary of spendthrift trust entitled to claim homestead exemption as to trust property). Thus, even if you own only a beneficial interest in the property, you are entitled to claim a homestead exemption to the forced sale of the property and the court cannot rule against you in foreclosing your interest in the property.
Based on this decision a Florida resident’s homestead property is still protected from creditors after the person conveys legal title to a living trust or any other trust as long as the resident retains a beneficial interest.
NEW BANKRUPTCY LAW
Fears that once the Bankruptcy Reform Act goes in effect on October 17, 2005, more and more creditors will try to force people into involuntary bankruptcy in order to strip debtors of exemptions otherwise available under Florida law. For example, many debtors with expensive homes who enjoyed unlimited homestead protection in state court would forfeit homestead protection above $125,000 if they were forced into bankruptcy court by a creditor who filed in an involuntary petition. One creditor with an undisputed and liquidated claim for $12,000 can file a petition for involuntary bankruptcy. However, upon further review, fears of involuntary bankruptcy epidemic under the new bankruptcy law may be exaggerated, and in fact, the new law may make it even more difficult for creditors to impose bankruptcy upon individuals.
Section 109 of the Bankruptcy Code describes who may be a debtor. The new subsection 109(h)(1) states that an individual may be a debtor only if the individual first complete a “briefing” from a nonprofit budget and credit counseling agency. There is no provision of the new law which gives a creditor, a trustee, or a court the right to compel an individual to get a credit briefing. It seems logical that an individual who has not had his credit briefing can not voluntarily or involuntarily be a debtor under the Bankruptcy Code. This credit briefing requirement may make involuntary petitions against individuals moot, and a creditor who files an involuntary petition against a debtor who has not submitted to a credit briefing would seem to be in “bad faith” and would subject the creditor to sanctions.
Prior to the Act, the authors note, a debtor could threaten a creditor with bankruptcy. After the Bankruptcy Reform Act, creditors will likely threaten to force a debtor into bankruptcy so, “the debtor’s assets can be picked clean.” The authors state that new asset protection plans should be designed to avoid bankruptcy and keep assets out of the bankruptcy estate in the even of a creditor’s involuntary petition.
The core issue under the new bankruptcy law is the criterion for involuntary bankruptcy. The standards for court approval of involuntary bankruptcy petitions vary among courts throughout the country. Bankruptcy law is very much local law where the law is established district by district by bankruptcy judges. One critical issue, overlooked by many commentators to date, is the common requirement that involuntary bankruptcy is far from automatic and involuntary petitions must be filed by creditors in good faith. Most courts have stated that involuntary bankruptcy may not in good faith be used as a collection hammer by an aggressive creditor, and the involuntary bankruptcy must serve a bankruptcy purpose, i.e, it must benefit creditors as a whole. Oversimplification of involuntary bankruptcy rules will lead to misguided asset protection planning.
Some provisions are effective immediately. One important change immediately effective is the $125,000 limit on protected homestead equity for those debtors who have owned their residence less than 40 months. Anyone with homestead equity greater than $125,000 and does not meet the 40 month waiting period and who is considering filing bankruptcy before the new bankruptcy law goes into effect should file bankruptcy immediately. The bill may be passed and signed in a couple weeks. File now and submit your completed schedules later.
The new bankruptcy law impacts homestead protection only in bankruptcy court and does not affect the homestead protection available in state court collection proceedings.
Keep in mind, the new bankruptcy law does not change Florida's homestead law or asset exemptions in state court proceedings. The changes are important only if a debtor files bankruptcy.
John
http://www.floridahomesteadservices.com