Trust cannot claim Homestead Exemption in Bankruptcy
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 to most of our clients because, despite the obvious advantage of avoidance of probate, we have always alerted them to the possibility of losing their homestead creditors' exemption (and certain other benefits, such as a potential Medicaid exemption) by putting the homestead in trust and then having to claim bankruptcy. Unlike some firms, we have never automatically transferred the family home into trust, but instead discuss the pros and cons of doing so with each client. 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.
But Florida Supreme Court Refuses to Limit Exemption
While the Florida exemption against forced sale of the homestead (commonly called the "homestead creditors' exemption") appears on its face to be fairly straightforward, many bankruptcy courts have struggled with its application, particularly in cases where it appears someone has intentionally availed himself of the exemption in order to defraud creditors. .
A recent case involved an individual who, three days before a $15 million judgment became enforceable against him, bought a Florida home for $650,000 cash. He claimed it as his homestead, despite the fact that he had till then been a lifelong Tennessee resident. Rather than struggle with the issue itself, this federal appellate court asked the Florida Supreme Court to answer whether the Florida constitution could protect a Florida homestead acquired by an individual with non-exempt funds and with the specific intent of "hindering, delaying or defrauding creditors"
Believe it or not, the Florida Supreme Court's response was an unqualified "YES." While it was "certainly loathe to provide constitutional sanction to the conduct alleged" the Court went on to say that it was "powerless" to ignore the plain language of the constitution. Only three exceptions are sanctioned by the constitution to this general rule: three exceptions to the homestead exemption. (1) the payment of taxes and assessments; (2) amounts owing for the purchase, improvement or repair to the home; or (3) obligations contracted for labor performed on the home."
In the past, Florida was a haven for creditors seeking to avoid creditors. This has not been the case so much recently, as the legislature attempted to alleviate this by tightening its "fraudulent conveyance" statute and enacting a "fraudulent conversion" statute. As a constitutionally protected exemption, however, many of us have believed the homestead is not subject to this legislation, and it appears the Supreme Court agrees."
We do not sanction the avoidance of creditors. Nonetheless certain of our clients have legitimate reasons for taking action to protect their assets, and the Florida homestead laws remain a valuable tool.