The Perfect Storm: Homestead, Trust, Second Marriage, and Debt

There are many who advocate the use of trusts for everything.  Probate is slow, expensive and generally awful, right?  The Florida Probate Code, the Florida Trust Code, and the Florida Probate Rules are designed to protect the wishes of a person who makes a will or trust. The laws and procedures also protect the intended beneficiaries of a will or trust, as well as protections for surviving family members, especially spouses.  When a Florida resident does not have a will or trust, and there is money, property, or other assets in his or her name, state law will essentially create a will for him or her, assuming family members would be the intended beneficiaries.  Sometimes, inadequate planning is worse than no planning. 

One challenging area for Floridians planning their estate is the homestead protections found in Article X, section 4, of the Florida Constitution. Sometimes the protections cause unintended results for the unwary.  When planning does not take into account the unique aspects of Florida homestead law, the owner's family could face the perfect storm of an invalid trust or will, litigation between family members, and the loss of the protection from creditor claims. 

Protection from Creditor Claims. The first protection is the protection from the claims of creditors.  The constitution says that creditors cannot force a Florida resident to sell his home, or the home where his family resides, to pay a debt. (Mortgages, property taxes and construction liens are exceptions.)  This protection continues when the owner dies and leaves the home to family members. The Third District Court of Appeals treated homestead passing through the deceased owner's trust differently that homestead passing directly under a will. 

• In Elmowitz v. Estate of Zimmerman, 647 So. 2d 1064, 1065 (Fla. 3d DCA 1994), the court said "[u]pon devise to the trust Zimmerman's property lost its homestead status and became merely another asset of the trust." Gloria Zimmerman left her home to her sister, Bonnie Plotkin, a gift that clearly would have been protected if accomplished through a will. Instead, the court noted in a footnote that Gloria did not specifically say I give my homestead residence to my sister but said I give all the rest of my trust assets to my sister.  That distinction would not matter for a will.  Why should it matter for a trust?  In short, the home was lost to creditor claims in Gloria's estate and the homestead protection that should have applied was disregarded because Gloria used a trust instead of a will. 

• Would the outcome have been different if Gloria's trust said I leave my home to my sister Bonnie?  It probably would have.  Should that distinction make a difference? 

The Florida Trust Code says that assets in a revocable trust are subject to the claims of the trust creator's creditors make a claim against assets in a revocable trust.  (Section 736.0505)  The statute does say, however, that any protections available to the creator of the trust are not lost simply because the protected asset is held subject to a revocable trust.  Shouldn't that mean homestead in a revocable trust is just as protected from creditor claims after the owners death?  Two courts have said "Yes!".  HCA Gulf Coast Hospitals and Engelke v. Engelke. 

 

Surviving Spouses and Minor Children. Another protection under Article X, section 4, applies to surviving spouses and surviving minor children.   Section 732.4015, Florida Statutes, recognizes that titling a home in a revocable trust does not change the fact that the creator of the trust is really the owner.  Article X, section 4(c) says an owner of homestead property who is survived by a spouse or minor child cannot leave the home to anyone else. 

• The state constitution trumps and overrides the trust.  If a married owner attempts to leave the home to someone other than his spouse, or is survived by a married child, then section Section 732.401, Florida Statutes, says the surviving spouse receives a life estate in the homestead residence and the decedent's descendants become the owners when the surviving spouse dies. The spouse could file an election to become a 50/50 owner with the deceased spouse's descendants, but that must be done within 6 months. This happens automatically, as if a new deed was issued at the moment of the owner's death. 

• An example of an invalid devise by John, a married man, would be "I give my wife, Linda, a life estate in my homestead residence, with a remainder interest to my wife's son, Lance."  Without a valid waiver of Linda's rights as a surviving spouse, the result is: a life estate to Linda, with a remainder interest to John's descendants, Robert, Albert, and William.   Linda is faced with the obligation to pay insurance, the interest portion of the mortgage payments, property taxes, and ordinary maintenance for her lifetime, without the ability to control where the property passes on her death.  Linda's son Lance receives nothing. 

• What about joint trusts?  Because of changing estate tax laws and the fear of the probate process, joint trusts are becoming more and more popular.  If certain factors are in place, it might not be a problem.  If a married couple (1) owns a residence jointly, (2) then conveys title to themselves as trustees of a joint trust that they created, (3) the trust allows the surviving spouse to amend, revoke or withdraw all of the trust property without anyone else's consent, and (4)  the trust does not place any restrictions on the survivor's ownership of the home, then there might not be a problem.  If, however, the trust puts any limits on the survivor's use and control of the homestead, or any of the four factors listed above are not in place, then probate will be required to sort out the rights of the deceased spouse's descendants.  At the very least, deeds from the deceased owner's children will be required to clear title. That is often a very bad situation where there are children from prior marriages who may not get along well with their stepparent.  It is also a problem where a child of the deceased owner is incapacitated, has judgment liens against them, marital problems, or other problems that affect the ownership of an interest in real property. 

• Section 732.702, Florida Statutes, allows a a married person to waive his or her rights to some or all of the surviving spouse's estate, including homestead.  This must be done through a written agreement signed in the presence of two witnesses.  If the agreement is signed before the marriage, financial disclosure is not required.  However, financial disclosure is always advisable to help ensure that the agreement will be upheld if challenged by the survivor. It is also important for each party to be represented separately, or at least aware that they should have their own attorney, in negotiating and signing the agreement.  A recently-enacted statute was intended to simply the procedures for a waiver of homestead rights by a married person.  Section 732.7025, Florida Statutes.  I co-authored an article about all of the considerations that go into a waiver of homestead rights.  Here's a link to the article. Another statute, Section 732.701, allows a couple to enter into a written agreement to "lock in" their estate plans so they can be changed after the first death. It is not as simple as a signature on a deed. 

• One thing that does not work is to title homestead in a trust that becomes irrevocable on the death of the first spouse.  Even though a couple may want to lock in their estate plan after the first death, they must have a valid prenuptial or post nuptial agreement to waive the surviving spouse's rights so that the plan will hold up. 

Due to all of these complications, it is often easier for a married couple to own their primary residence in their individual names, which allows the survivor to be the sole owner without the need for probate. 

Planning for Minor Children.  To plan for situations where the homeowner could be survived by a minor child, there are a few options: 

• Ownership by a husband and wife does not result in a "devise" at the first spouse's death.  The constitution prohibits a devise, but not a transfer based upon survivorship rights.  See section 731.201(33), Florida Statutes. 

• A lifetime conveyance to an irrevocable trust does not result in a prohibited devise.  Although this strategy is recognized by section 732.4017, Florida Statutes, is comes with complications and drawbacks that don't fit into every estate plan. 

• Using a basic will that designates a guardian of the property to handle the inheritance of minor children can work.  It would require probate and a separate guardianship for each minor child.  Yes, that means some extra work and expenses, but those procedures are designed to protect the interests of minor children. 

Special Considerations for Trusts.  Many Florida attorneys would simply say, don't put your home into a revocable trust.  If you understand the risks involved, and obtain counsel from an experienced, Florida attorney, the following considerations should be taken into account when titling homestead property in a trust: 

• State that by utilizing a trust in  your estate planning, you do not intend to waive any protections under Florida law, including Article X, section 4 of the Florida Constitution; the Florida Probate Code; the Florida Trust Code; and Chapter 222 of the Florida Statutes entitled "Method of Setting Apart Homestead and Other Exemptions."

• For a married couple, the trust should state that the surviving spouse has the right to amend and revoke the trust without anyone else's permission and retains the equivalent of a fee simple interest in the homestead residence, including the unrestricted right to convey, sell, and reside in the home. Anything less creates a title defect on the first spouse's death.

• If only one spouse owns the home, that spouse's trust must give the surviving spouse unrestricted, fee simple ownership on the death of the first spouse. 

• Use written, signed waivers of spousal rights when appropriate.

• Devise the home directly to surviving family members without requiring that the home be held in trust or controlled by the trustee. 

• THIS POST IS NOT A DO-IT-YOURSELF GUIDE OR SELF-HELP LEGAL ADVICE.  IT IS INTENDED TO HELP OTHER LICENSED PROFESSIONALS AND TO ENCOURAGE NON-LAWYERS TO HIRE AN EXPERIENCED ATTORNEY LICENSED IN FLORIDA.  THE SUGGESTIONS AND COMMENTS ARE GENERAL AND DO NOT APPLY TO EVERY SITUATION. 

There is no single, easy answer that works for everyone.  Sometimes it makes sense for a homeowner to transfer his home to a trust.  In other cases, it can be a disaster.  With all of the rights and interests at stake, it will take thought, effort time and, yes, money, to plan properly.  When Florida homestead property is involved, generic trusts, or trusts prepared by non-lawyers or inexperienced lawyers, can actual create a situation that is worse than probate, or cause the need for probate instead of avoiding it. The time, money and effort invested in good planning will be a worthwhile investment in protecting your plans and your family.