Recent Developments: Florida Homestead and Revocable Trusts
Bankruptcy Court Decision Causes Pause as to Whether a Principal Residence Owned by a Revocable Trust Will Qualify for the Homestead Exemption
Florida residents and estate planning attorneys were unfortunately sent in to a tailspin in 2001 due to a decision by the United States Bankruptcy Court in Florida that held real estate owned by a revocable trust does not qualify for the very liberal Florida homestead exemption. Despite many commentators expressing their disagreement with the decision, lawyers were now forced to rethink the effectiveness of this common probate avoidance technique as it applied to most client's largest asset. Fortunately, recent court decisions appear to provide practitioners with sufficient authority to reinstitute the use of such trusts for the principal residence.
The homestead is established pursuant to Article X, Section 4(a) of the Florida Constitution. The pertinent part of the section reads as follows: "(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, if located outside a municipality, to the extent of one hundred sixty acres of contiguous land and improvements thereon, which shall not be reduced without the owner's consent by reason of subsequent inclusion in a municipality; or if located within a municipality, to the extent of one-half acre of contiguous land, upon which the exemption shall be limited to the residence of the owner or the owner's family."
The issue and controversy associated with property in a revocable trust arises from the phrase "natural person" and how the United States Bankruptcy Court for the Middle District of Florida interpreted this term in 2001. In In re Bosonetto, the court held that a debtor could not claim a Florida Homestead exemption for residential property held as trustee of her revocable trust. Despite the fact that the debtor owned legal and equitable title to the property, the court stated that because the trust was not a natural person, she could not claim the exemption.
Although the Bosonetto case has not been officially overturned, recent decisions have come down that would appear to erode the effectiveness of what many commentators feel is simply a poor court interpretation. In fact, two such decisions come from the same bankruptcy court as Bosonetto. In In re Alexander, Bankr. M.D. Fla. (2006), the court noted that the Constitution has been interpreted as applying to a variety of interests in land and does not distinguish different types of ownership interests that qualify for the homestead exemption. It pointed to instances where courts upheld the homestead when the debtor merely leased the land as it amounted to the equivalent of absolute ownership. "This Court...declines to follow the reasoning in Bosonetto. Bosonetto does not cite to any Florida cases in support of its ruling nor does it account for the contrary holdings of several courts . . ." As a result, the court ruled the debtor's real estate was protected from creditors pursuant to the homestead exemption. The court in Alexander cited to a Fourth District Court of Appeals case for support of its position.
The decedent in Engelke v. Estate of Engelke, 921 So. 2d 693 (Fla. 4th DCA 2006) also held real estate in a revocable trust, but the court still concluded that the property was owned by a "natural person" for purposes of the exemption. "Because (the decedent) 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 (the decedent's) interest as beneficiary of his own revocable trust would entitle him to constitutional homestead protections." The court added that the revocable trust was merely a will substitute device and, absent a specific provision in the trust to sell the real estate, the fact the instrument provided for payment of estate expenses would not trump the homestead exemption.
The court in In re Edwards, Bankr. M.D. Fla., decided in October 2006, provided the following commentary, "The issue for determination is whether real property in which a debtor resides qualifies for the Florida homestead exemption when title to the property is held by a revocable trust. The issue is governed by Florida state statutory and case law. Florida opted out of the federal bankruptcy exemption scheme and a debtor filing for bankruptcy protection in Florida must use Florida's state law exemptions. The Florida exemptions include a homestead exemption found at Florida Constitution, Article X, Section 4(a)(1) . . . The great weight of the relevant case law holds to the contrary. Fee simple title of the property is not required, and an equitable or legal interest should afford protection pursuant to the provision."
As noted above, Bosonetto is still technically valid law despite the apparent decision of the Bankruptcy Court and Court of Appeals to ignore the rationale behind the holding. But, the weight of authority is clearly shifting away from the controversial decision. Therefore, practioners should feel a significant comfort level when counseling Florida clients with respect to the funding of revocable trusts with a principal residence with ample authority now supporting such a position.
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