Estate Planning With Florida Homestead Property - Caution Required
Many people are familiar with Florida’s tax exemption for homestead property – one of the benefits of becoming a Florida resident. Florida residents are entitled to a $50,000 exemption from the value of their property for the annual real estate tax ($25,000 for certain taxing authorities, such as the school tax). Furthermore, a “cap" of 3% or the rate of inflation (whichever is less) prevents the homestead taxable value from increasing precipitously in any one year. The homestead tax exemption saved the typical Sarasota County resident approximately $500 in real estate taxes during the past year, according to the Sarasota Property Appraiser’s office.
Less well understood are the homestead protections from the claims of creditors (other than a mortgage lender) and the restrictions on transfers of homestead property at death. This article will focus on the issues relating to transferring homestead property at death.
Spouse and Minor Children
The general rule is that your will or trust cannot control the distribution of your homestead property if you have a spouse and/or minor children. If an individual has a homestead in his or her sole name at the time of his or her death, the property automatically passes with a life estate to the spouse and a remainder interest to the decedent’s descendants. On the other hand, if the real estate is titled in joint name (right of survivorship) with the spouse, the surviving spouse takes the full title to the property at death.
As an example, if a husband and wife die in a common accident, the estate plan created for minor children will not automatically control the Florida homestead. Instead, a guardianship proceeding will be required and the guardianship will at least initially control the homestead. Certain types of specialized trusts may mitigate this result, but the standard estate planning trust will not.
If there are no minor children, the general rule is that you may only devise the homestead property to your spouse – and any attempt to do otherwise results in a life estate in the spouse and a remainder interest in the decedent’s descendants. Again, if title is held by spouses with rights of survivorship, the estate plan will not matter and the homestead will automatically pass to the surviving spouse.
A spouse may waive his or her homestead rights through a valid pre- or post-nuptial agreement, which will then allow the decedent to control the homestead through the will or trust (assuming no minor children). However, many second marriages proceed without nuptial agreements and without full understanding of the fact that one of the spouses, as sole owner of the homestead property, cannot devise the homestead at death without a nuptial agreement (unless it is devised solely to the spouse).
Homestead in Trust
You may not accomplish through a standard estate planning trust something that you cannot do under your will. In other words, you may not leave your homestead in any manner other than outright to your spouse, unless you have a valid nuptial agreement.
Frequently, in order to balance each spouse’s taxable estate for estate tax purposes, the homestead will be placed into the trust of one spouse, or split in some fractional manner between the two spouse’s respective trusts. The plan typically says to keep the homestead (or a portion thereof) in trust for the lifetime of the surviving spouse, with ultimate distribution to the family. Since this typical plan does not distribute the homestead “outright to the spouse", it violates homestead law (absent a nuptial agreement) and results in a life estate to the spouse and a remainder interest in the descendants of the first-to-die spouse.
While a life estate to the spouse with a remainder interest to the descendants may sound like what you are doing in the trust, once the surviving spouse attempts to sell the homestead after the first spouse’s death, the differences will become apparent. With the life estate situation, upon the sale, the spouse receives only a portion of the sale proceeds – either the actuarially calculated value of the remaining “lifetime interest" or a ½ “tenant in common interest" – at the surviving spouse’s election. The spouse and the descendants must sign the listing and sale contracts and deeds. Furthermore, descendants of the first-to-die spouse (not the descendants of the surviving spouse, if different) receive equal shares of the remainder interest outright (which may or may not match the intended estate plan).
Problems in homestead planning are often made due to a lack of attorney involvement, through a misdirected title insurance company or from a self-drawn deed. Alternately, while a non-resident holding Florida property in Trust is not a problem, once that person becomes a Florida resident, the homestead restrictions mentioned above come into play.
Fixing homestead planning errors after death may be expensive and may, in fact, not be possible if there are uncooperative heirs. Caution is urged when planning with homestead and attorney involvement is recommended.