Use Of Trusts
Placing Homestead In Revocable Living Trust
Because the use of living trusts has expanded in recent years, it is not uncommon to title real property, including homestead, in the name of the trustee of a revocable living trust. Many practitioners mistakenly believe that transferring the client's residence into a revocable trust avoids the restraints on alienation of the property that are imposed by homestead status. A residence owned by a client and spouse as an estate by the entireties is statutorily exempt from the restraints on alienation because it is not homestead for purposes of devise and descent. F.S. 732.401(2). A corresponding exemption does not exist, however, for a residence titled in the owner's revocable living trust.
The District Court of Appeal, Fourth District, held in In re Estate of Johnson, 397 So.2d 970 (Fla. 4th DCA 1981), that one cannot convey homestead to a trustee during lifetime to avoid the restraint on alienation if one is in fact survived by a spouse or minor child. In other words, one cannot do indirectly what one cannot do directly.
In 1992 the Florida Legislature amended F.S. 732.4015 to add subsection (2), which provides:
(a) "Owner" includes the grantor of a trust described in s. 733.707(3) that is evidenced by a written instrument which is in existence at the time of the grantor's death as if the interest held in trust was owned by the grantor.
(b) "Devise" includes a disposition by trust of that portion of the trust estate which, if titled in the name of the grantor of the trust, would be the grantor's homestead.
The statute codified case law to make it clear that title to real property held in a revocable living trust remains homestead when it would have been homestead if it had remained titled in the grantor's name alone.
Example: John owns and resides in a home titled in his name alone. John is single. He has an adult daughter, Mary, and two minor children who live with his ex-spouse. John wants to convey his residence to his revocable living trust. The trust provides that John shall have the use and benefit of the trust for his lifetime, and on his death his minor children shall have the use and benefit of the trust estate until they both attain majority, after which the trustee is to distribute the property to John's daughter, Mary, outright in fee simple. The questions to consider are as follows:
• Is John's residence homestead property? Yes, the residence is John's homestead.
• Can the residence be distributed pursuant to the terms of the trust? Only if both of John's minor children have attained majority at the time of John's death and he leaves no surviving spouse. Otherwise, the distribution fails and the homestead devolves to John's children through intestate succession under F.S. 732.401 and 732.4015(1).
• Is the residence insulated from the claims of John's creditors? Whether the exemption from forced sale to satisfy the claims of John's creditors inures to John's heirs will depend on who receives the residence at John's death. If the homestead passes to John's children by intestacy, it is protected. If his children have attained majority and the trust provisions control, the remainder interest to his adult daughter would be protected under the principles of Snyder v. Davis, 699 So.2d 999 (Fla. 1997). Practitioners should note also the possible loss of the protection from creditors during John's lifetime, discussed in §6.11.
As set forth in the example above, the residence will be the homestead of the grantor and will be subject to the constitutional and statutory restrictions, notwithstanding that legal title to the property is vested in his revocable living trust.
Example 2: Harry and Wilma have owned their residence as an estate by the entireties for many years. They do not have any minor children. Their marriage is a second marriage of long duration and there are children of both prior marriages. Harry creates a revocable living trust and designates a bank as trustee. Harry reserves all the usual powers to alter, amend, and revoke. The terms of the trust provide that if Wilma survives she receives all the income, with discretionary encroachment into principal by the independent trustee. On the representation and agreement that Wilma will be provided for in the trust, she joins Harry as a grantor and conveys their residence into Harry's trust.
The property has now become subject to F.S. 732.4015(2). Although the residence may be conveyed into a revocable trust as a will substitute, that section provides that the trust cannot distribute the property any differently than a will could devise the property. The statute does not permit an interpretation that the property is not homestead.
If Harry dies before removing the residence from the trust, his daughter could file a petition to determine homestead, claiming the remainder interest. Wilma would want either the return of her fee simple interest or to have the property to remain in the trust, producing income for her with the trustee's ability to encroach if required.
An unanswered question is the consequence of a distribution from the trust. Because Harry's intended distribution from the trust is thwarted, to whom does the title to the homestead devolve? If Harry's will does not provide for an alternate distribution and the residuary probate estate pours over to Harry's trust, Wilma would take a life estate and Harry's daughter would take a vested remainder in the homestead under F.S. 732.401(1). If Harry's will provides for an alternate distribution or does not pour over to Harry's trust, it is uncertain if Wilma would take a life estate and his daughter a vested remainder in the homestead under the statute. If the alternative devise under Harry's will was to Wilma in fee simple, it is possible his will would control.
By placing the title to the homestead in the trust, the practitioner may create confusion as to the devolution of title, because a review of the chain of title will reflect title as having been vested in the trustee of the revocable living trust. If the title was passed to the trustee by the use of an F.S. 689.071 deed, the trust instrument will not appear of record and a title examiner will have to make inquiry to determine if the grantor was survived by a spouse or minor child. The title examiner must ascertain if title to the property devolves through the trustee or if the property was the grantor's homestead, passing outside of the trust notwithstanding record title. Although a determination of homestead status is not required, if the title would appear in the public records to devolve otherwise than as homestead property, the rights of the lineal descendants of the owner should be investigated. See Cavanaugh v. Cavanaugh, 542 So.2d 1345 (Fla. 1st DCA 1989). A cautious title examiner will require an affidavit of the trustee that the property was not the grantor's homestead, or, if it was, that the grantor was not survived by a spouse or minor child and could alienate the homestead. A prudent title examiner will require an order or declaratory judgment determining homestead status of the residence in the trust estate.
Devising Homestead To Trust
Although planners should exercise great caution in this area, it has been held that a testamentary devise to a trust established for the benefit of a person to whom the deceased owner's exemption from forced sale inures under Art. X, sec. 4(a) of the Florida Constitution may qualify as a permitted and valid devise of the homestead.
In In re Estate of Donovan, 550 So.2d 37 (Fla. 2d DCA 1989), the decedent died testate survived by a spouse and adult daughter. The district court held that the devise of the homestead property to an inter vivos trust in which the wife was both trustee and beneficiary was a sufficiently direct devise to the owner's spouse to satisfy the requirements of F.S. 732.4015(1). The court noted that the testator may devise homestead property by the residuary clause in a will as long as the residuary clause sufficiently indicates a testamentary intent that the homestead pass to the surviving spouse, and found that the residuary clause in Donovan's will adequately evidenced such an intent. The court stated that although the trust was an inter vivos document, it was appropriate to read the will and trust agreement together to determine testamentary intent, and noted that nothing in either the will or the trust suggested that the decedent did not intend to pass the property through the residuary clause of his will to a trust for his wife if she survived him. The court also noted:
We think . . . that the obvious intent and the resulting effect of Mr. Donovan's will and trust are of greater importance than the technicalities of terms used in those documents.
It must be remembered that the purpose behind the constitution's homestead devise prohibition is to protect the interest of the surviving spouse. Thus, the homestead law is to be liberally construed for the benefit of the surviving spouse it was designed to protect. M.O. Logue Sod Service, Inc. v. Logue, 422 So.2d 71, 72 (Fla. 2d DCA 1972).
Donovan, 550 So.2d at 39. The Second District is giving a very liberal reading to the constitutional and statutory homestead provisions, and may not be in tune with the strict construction approach adopted by the Supreme Court in In re Estate of Scholtz, 543 So.2d 219 (Fla. 1989), and Public Health Trust of Dade County v. Lopez, 531 So.2d 946 (Fla. 1988).
In HCA Gulf Coast Hospital v. Estate of Downing, 594 So.2d 774 (Fla. 1st DCA 1992), the decedent died testate and her estate consisted entirely of homestead real property valued at $45,000. She was survived by her daughter, an only child. The facts imply that the decedent was not married and her daughter was an adult. The will designated the decedent's former husband as her personal representative. He petitioned the court for administration and a declaration that the property devised in trust for their daughter was homestead property. A creditor objected to the petition on the ground that the homestead was not devised to a protected heir (i.e., the daughter) but rather was devised to the decedent's former husband, as trustee. It was the creditor's argument that the trustee could not himself claim the protection from forced sale as an heir of the owner, with the result that the protection from forced sale expired with the death of the owner. Citing Lopez and In re Estate of Skuro, 467 So.2d 1098 (Fla. 4th DCA 1985), approved 487 So.2d 1065, the District Court of Appeal, First District, noted that homestead provisions should be construed liberally to effectuate their purpose. The court found that Donovan was distinguishable because in Donovan the trustee and the beneficiary were one and the same person. Both the legal and beneficial interests in the Donovan homestead merged in the surviving spouse irrespective of the terms of the trust. The result of the testator's disposition was tantamount to a direct devise to the wife.
The First District seized on the Donovan court's reasoning that the intent and resulting effect of the will and trust were of greater importance than the technicalities of terms used in those documents. The court found the intent and resulting effect of the Downing spendthrift trust was that the benefit of the homestead property would inure entirely to the daughter:
This was her intent just as surely as if the property were devised directly to her daughter by will or passed by intestacy. That Phyllis Downing chose to effectuate her intent through a spendthrift trust rather than a will seems to us a matter of form rather than substance.
Id. at 776. Citing Bartelt v. Bartelt, 579 So.2d 282 (Fla. 3d DCA 1991), and Kelley, Homestead Made Easy, Part I: Understanding the Basics, 65 Fla. Bar J. 17, 22 (March 1991), the district court noted that the Florida Constitution defines the class of persons to whom the decedent's exemption from forced sale inures, but does not mandate the technique by which the qualified heir must receive title. The court's decision specifically relied on the fact that the trustee, although possessed of legal title to the homestead, "exercised nothing more than a supervisory interest in the [property]." Downing, 594 So.2d at 776. Thus, the benefit of the exemption inured to the daughter who was a spendthrift beneficiary and who would otherwise be entitled to claim homestead protection as if title passed directly to her by devise or intestacy. The daughter could hold equitable title to the homestead property free from the claims of her mother's creditors. It is implied that the daughter received all the benefits from the trust estate. It should be emphasized that the court commented that if the facts were otherwise, the result may have been entirely different.
It appears that the First District is using the term "spendthrift trust" in the sense that the property devised to the trust is thereby protected from the creditors of the deceased owner, and not those of the trust beneficiary. If the daughter had received the homestead outright, it would be protected from forced sale to satisfy the claims of the deceased owner's creditors only. It would not be protected from the daughter's creditors unless the residence was the daughter's homestead.
At best, it is risky to devise homestead to a trust for the benefit of an heir and expect the devise to be protected from the claims of the deceased owner's creditors. Again, great caution is urged.
Advising Clients On Use Of Trusts In Homestead Planning
A client requesting that his or her residence be placed in a revocable living trust should be advised that the homestead must be devisable as of the time of death without any restraint on alienation, or the provisions of F.S. 732.4015 will control.
A client requesting that devisable homestead be transferred to a revocable living trust to avoid probate should be advised that under F.S. 733.607 and 733.608, homestead property to which the owner's exemption from forced sale inures is not a probate asset. Therefore, there may be no advantage to transferring the title to a revocable living trust to make the testamentary disposition.
Title to protected homestead passes outside of probate, even if the will passes the homestead property by a specific or residuary devise. The will is a muniment of title, which establishes on the public records the devolution of the title to the homestead. The probate proceedings can be used in lieu of a declaratory judgment action to determine the homestead status of the property and to whom the exemption from forced sale inures.
Placing the homestead in a living trust could also result in the loss of the exemption from forced sale during the lifetime of the owner in bankruptcy. In In re Bosonetto, 271 B.R. 403 (Bankr. M.D. Fla. 2001), it was held that an interest in homestead placed in a living trust was not protected from creditors in bankruptcy because it was not "owned by a natural person," as required by Art. X, sec. 4(a) of the Florida Constitution.
If the client desires to leave devisable homestead to a person to whom the exemption from forced sale does not inure, it could be advantageous to transfer the title to the homestead to a revocable living trust to avoid probate and possible problems should the grantor become incapacitated. As long as the client is not survived by a spouse or minor child, there is no restraint on the client's ability to transfer title to the homestead through a revocable living trust. F.S. 732.4015(2). At death, the homestead will be subject to the claims of creditors regardless of whether it is a trust or probate asset. F.S. 733.707(3).
The joinder of the spouse, if any, is always required to convey title to homestead property. Granting specific authority to convey the homestead to the donee of a durable power of attorney should enable the conveyance of the property if the owner should become unable to manage his or her affairs.
The attorney representing a trustee should always be aware of the homestead issue if a residence is included in a trust corpus. If the homestead is not recognized as such and is sold in satisfaction of claims against the estate of the grantor, the trustee could be liable to the surviving spouse and heirs of the deceased owner should a determination of homestead status be made at a later date.
Trust properties, properties eligible for exemption
Taxpayers who placed their permanent residence in qualified personal residence trust (QPRT), which is provision in Internal Revenue Code which allows homeowners to transfer property to their children while avoiding future estate taxes, were entitled to homestead exemption, even though QPRT limited taxpayers' use of residence to earlier of ten years from QPRT's creation or one of taxpayer's death, as it was sufficient that taxpayers owned beneficial title to residence during year in which they claimed exemption. Robbins v. Welbaum, App. 3 Dist., 664 So.2d 1 (1995). Taxation 219
A homestead exemption is not available to the settlor or beneficiary of a trust that grants the beneficiary a possessory interest for a term of years in the corpus of the trust, despite the fact that the settlor or beneficiary might otherwise meet the requirements of West's F.S.A. § 196.031(1). Op.Atty.Gen. 94-50, June 2, 1994.
Under present Florida law, the interest of one who is the settlor of a trust, as well as being co-trustee and beneficiary, does not qualify for a claim of homestead exemption from ad valorem taxation on the trust property even though such person might maintain permanent residence thereon. None of these three incidents separately qualifies for a claim of homestead exemption, and their concurrence likewise cannot be said to qualify. Op.Atty.Gen., 076-204, Oct. 8, 1976.
As a general rule, where real property is placed in trust, the trust beneficiary, even where he makes his permanent home on the real estate, does not have "legal or equitable title to real estate" within the meaning of Const. Art. 7, § 6, sufficient to maintain a claim for homestead exemption; however, where the trust in question is of such nature that it would be considered a passive rather than an active trust, and the beneficiary has a present possessory interest and makes real estate comprising the corpus of the trust his permanent home, he may have sufficient equitable title to real estate so as to support a claim for homestead tax exemption. Op.Atty.Gen., 074-313, Oct. 14, 1974.
The interest in real property upon which claim of homestead property tax exemption is based must be a present possessory interest, which requirement is not met by a trust settlor's retained right to direct action as to title to the property, even when settlor is in fact in possession. Op.Atty.Gen., 072-120, March 29, 1972.