Advisor Connections Newsletter™
October 27, 2015
Have Florida Clients? If So, Beware of Homestead
Have Florida Clients? If So, Beware of Homestead
As an increasing number Ohio residents are buying property and spending more time in the Sunshine State, eventually making Florida their permanent residence (usually not the other way around, with the notable exception of LeBron James), it is important to be aware of the many legal differences in Florida that could frustrate a client’s estate plan.
Estate planning for clients who live in or plan on moving to Florida is complex, and it is absolutely recommended that they seek the review of a Florida attorney to ensure their estate planning goals are still being achieved.
I. Introduction to Homestead
One of the primary differences between Ohio and Florida law that is most likely to thwart an estate plan are Florida’s unique and powerful homestead laws. There is a lot of misinformation floating around about homestead due to its different layers and complex applications (for a visual illustration, see attorney Rohan Kelley’s Homestead Paradigm chart).
Although the definition of property that qualifies as “homestead” is much more nuanced, for purposes of this article, an individual’s primary residence is considered their “homestead.” It is essential that any property owned by a Florida client be evaluated for its homestead status, how it is titled, and what the client’s estate planning objectives and expectations are. Property may be considered homestead even if it is not the primary residence of the owner, but rather it is occupied by someone else in their family. In other circumstances, only a portion of the primary residence may be given homestead-status.
Generally, there are three concepts of Florida law associated with the term “homestead”:
II. The Homestead Tax Exemption
Most Florida residents associate the term “homestead exemption” with the generous property tax reduction that they can take advantage of for their primary residence. Florida residents may apply to receive a property tax exemption of up to $50,000 of the assessed value of their primary residence. Also, the taxable value of their home cannot be increased by more than 3% each year by way of “passive appreciation” (known as the “Save Our Homes savings”).
III. Homestead Creditor Protection
Additionally, the Florida Constitution provides that an individual’s homestead property, without limit as to value, is protected from a forced sale by creditors, making it one of the strongest forms of asset protection in the country. There are only a handful of creditors that are able to force a sale of homestead property, which involve either repayment of taxes, or obligations arising from purchasing, improving, or repairing the property.
This benefit is not only extended to the homestead owner, but it also extends to their surviving spouse and heirs. However, improper counseling and document drafting risk unnecessarily losing these creditor protections for the family, so care must be taken.
IV. Homestead Restraints on Devise and Distribution
Most importantly, clients need to be aware that Florida homestead property cannot be transferred upon their death in the same manner as non-homestead property or property situated in Ohio.
The Florida Constitution restricts an individual’s ability to devise homestead property in their will or trust if they are survived by either a spouse or minor child. Any devise of homestead property under these circumstances is declared invalid (a minor exception allows homestead property to be passed to a surviving spouse in fee simple, so long as there are no minor children), and the homestead property passes as “intestate property,” which is subject to the laws of default succession as if the individual died without a valid will or trust.
Like most states, Florida’s intestate succession pattern primarily benefits a surviving spouse and lineal descendants. However, its application is likely to frustrate an individual’s estate planning objectives, especially in second marriage situations, or if they intended to leave homestead property to friends, charities, non-blood relatives, or a trust. This causes many intended property distributions to fail, resulting in the primary residence, which is typically a significant asset of the estate, being distributed to unintended beneficiaries.
It is worth noting that the homestead restrictions apply even if the property is owned in the individual’s living trust, so a living trust cannot be used to circumvent the homestead restrictions. Matters are further complicated when married couples attempt to fund a Credit Shelter Trust (a frequently used technique for federal estate tax planning) with homestead property after the first spouse passes away. This would be considered an invalid devise and may necessitate a spousal disclaimer or waiver of homestead rights within a post-nuptial agreement (which Ohio law does not permit) to be achieved.
Ownership matters with regards to the application of homestead laws, and real property owned as tenancy by the entireties or joint ownership with rights of survivorship falls outside of the restrictions on distribution (but the creditor protection and tax benefits may still be available). It is also important to point out that homestead property need not be declared homestead for the restrictions on devise and distribution to apply (whereas the owner needs to apply for the tax exemption). The limitations regarding the devise of homestead are distinct from the property tax concepts of homestead.
The homestead rules are complex and often misinterpreted, even by experienced Florida practitioners. You cannot assume that an out-of-state attorney who drafted a Florida resident’s estate plan is aware of or fully understands the intricacies of Florida homestead laws. For those clients, their testamentary wishes are at risk.
For any questions or comments regarding homestead or other matters of Florida-specific estate planning, please contact Joe Ferraro at (216) 236-6480 or Joe@lifedesignlaw.com.
*Joseph M. Ferraro is licensed to practice law in both Ohio and Florida