Many Florida estate plans include setting up a revocable living trust (“Trust”). One advantage of having a Trust is that it avoids assets or property having to go through probate. In order to be effective, once the Trust is executed, certain assets need to be transferred into or re-titled in the name of the Trust. This allows those assets to pass outside of probate.
One question which we commonly hear in our estate planning practice is “Should we transfer our homestead into the Trust?” From the standpoint of avoiding probate, the answer is an emphatic “yes!” Avoiding probate can save your family and loved ones time, money and aggravation.
This having been said, some lawyers discourage clients from placing their homestead into their Trust. Aside from these lawyers someday getting to probate the homestead, why would they advise against placing the homestead in the Trust? In order to answer this question, a little background is helpful.
Homestead property is protected from the claims of creditors. Article X, Section 4 of the Florida Constitution provides, in pertinent part:
(a) There shall be exempt from forced sale under process of any court, and no judgment, decree or execution shall be a lien thereon, except for the payment of taxes and assessments thereon, obligations contracted for the purchase, improvement or repair thereof, or obligations contracted for house, field or other labor performed on the realty, the following property owned by a natural person: (1) a homestead, . . .(emphasis added)
So a homestead (primary residence) is protected from creditor claims if it is owned by a natural person. If you own a homestead and you get sued, the creditor cannot touch your homestead. So preserving that homestead protection is important.
Years ago, there was Bankruptcy case known as In re Bosonetto, 271 B.R. 403 (Bankr. M.D. Fla. 2001). In that case, the court considered whether a person’s homestead protection extended to a situation where the homestead was transferred into the person’s Trust. In that 2001 case, the court ruled that a Trust was not a “natural person” and therefore the homestead was not entitled to the protection from creditor claims. Unfortunately, the court’s ruling in Bosonetto was not appealed so for a number of years after that ruling, Florida attorneys discouraged clients from putting their homestead into their Trust.
However, Bosonetto is no longer good law. Florida’s own courts have ruled that when a person’s primary residence is titled in a Trust, it is held by a natural person. For example, in Engelke v. Estate of Engelke, 921 So.2d 693 (Fla. 4th DCA 2006), Paul Engelke died leaving a Trust. The issue arose whether his primary residence held in the Trust constituted Paul’s homestead. There, the Fourth District Court of Appeals stated:
We note that in this case while Paul’s residence was held in a revocable trust, it was owned by a “natural person” for purposes of the constitutional homestead exemption. Because Paul retained a right of revocation, he was free to revoke the trust at any point in time. Accordingly, he maintained an ownership interest in his residence, even though a revocable trust held title to the property. We therefore conclude that Paul’s interest in his residence as beneficiary of his own revocable trust would entitle him to constitutional homestead protections (emphasis added)
Other Florida courts have followed this lead. In Cutler v. Cutler, 994 So.2d 341 (Fla. 3d DCA 2008), one party argued that the residence in question (which was titled in a Trust) did not qualify as homestead property because it was not owned by a “natural person” at the time of death. The Third District appeals court disagreed and ruled:
This court, and other district courts of appeal as well, have confirmed that property held in trust may be impressed, legally speaking, with the character of homestead….This court has also confirmed that the Florida Constitution does not limit the types of interests that may qualify for homestead protection….As our sister court in Southern Walls, Inc. v. Stilwell Corp., 810 So.2d 566 (Fla. 5th DCA 2002), has stated:
The Constitution limits the homestead land area that may be exempted, but it does not define or limit the estates in land to which homestead exemption may apply; therefore, in the absence of controlling provisions or principles of law to the contrary, the exemptions allowed by section 1, article 10 [now Article X, section 4], may attach to any estate in land owned by the head of a family [now natural person] residing in this state, whether it is a freehold or less estate, if the land does not exceed the designated area and it is in fact the [natural person’s] home place.
In Callava v. Feinberg, 864 So.2d 429 (Fla. 3d DCA 2003) a party argued that property was not entitled to homestead protection because the property was held in trust. In Callava, the court ruled:
[The] argument is not well taken. 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”….Thus, even if Callava owns only a beneficial interest in the property, she is entitled to claim a homestead exemption to the forced sale of the property and the trial court erred in foreclosing her interest in the property.
Even the Bankruptcy Court for the Middle District of Florida, where much of the confusion began with Bosonetto, has backed off of its position. In In re Alexander, 346 B.R. 546 (Bankr. M.D. Fla. 2006), the court was faced with this issue:
The sole issue currently before this Court is whether the Homestead property in Clearwater, Florida, qualifies for Florida’s homestead exemption when title to the property is in a revocable trust and the Debtor’s interest in the property is as trustee and primary beneficiary.
In Alexander, the court ruled that in order to qualify for Florida’s homestead exemption a person must have an ownership interest in a residence that gives him or her the right to use and occupy it as his or her place of abode. The individual claiming the exemption need not hold fee simple title to the property. It is sufficient if the individual’s legal or equitable interests give the individual the legal right to use and possess the property as a residence. Ultimately, the Alexander court ruled that the homestead protection extended to the debtor’s property even though it was titled in a Trust.
These cases clearly support the premise that owning a primary residence in a Trust maintains the homestead protection. The courts have recognized that ownership by the Trust amounts to the residence being owned by a natural person. However, one point to note. There has never been a direct ruling on this issue by the Supreme Court of Florida. Notwithstanding this, given the rulings by multiple appellate and Bankruptcy courts, it is reasonable to surmise that the Supreme Court has not taken up this issue because it does not disagree with the appellate court rulings.
The complexity of this issue shows why it is wise to seek experienced legal counsel when setting up your estate plan. Using an online service or computer software package, you’re not going to get the legal advice that you need in order to make these types of decisions.