Basic Probate, Guardianship and Elder Law CLE
Thursday, February 18, 2016
Tampa Airport Marriott
Jeffrey S. Goethe
Florida Bar Board Certified Wills, Trusts and Estates Attorney
Barnes Walker, Goethe, Hoonhout, Perron & Shea, PLLC
3119 Manatee Avenue West
Bradenton, FL 34025
The following materials are intended for educational purposes only. They do not serve as a substitute for the advice of a licensed attorney. Each situation must be evaluated based upon its own unique facts and circumstances and the application of current law to those facts. Any forms, case citations, statutory citations, charts, diagrams, opinions, or other information in these materials should serve as a starting point for an attorney advising a client in an attorney-client relationship and should not be sole basis for the handling of any legal or tax matter.
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this article (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
Part I. PROTECTION AGAINST CREDITOR CLAIMS
The public policy behind the constitutional homestead protections is clear:
The purpose of the homestead exemption is to promote the stability and welfare of the state by securing to the householder a home, so that the homeowner and his or her heirs may live beyond the reach of financial misfortune and the demands of creditors who have given credit under such law.
Identifying the facts that qualify a property as protected homestead is an important part of the planning process. It is also an aspect of planning that can change drastically with a client’s circumstances.
A. Ownership Interest Required
The qualifications for the homestead protection against creditor claims are found in Article X, Section 4(a) of the Florida Constitution:
(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, … 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;
Art. X, § 4(a), Fla. Const. (emphasis supplied). In general, the courts have focused on the right to possess and reside upon the property.
1. Family Protection
The protection against creditor’s claims extends to the primary residence of the owner and the owner’s family. Art. X, § 4, Fla. Const. This means that if a couple is divorced, and the husband’s children continue to live in the home, and the husband remains an owner, it is protected from his creditors, even if he resides someplace else.
In Beltran v. Kalb, the Third District conducted a similar analysis when a creditor of the former husband attempted to force the sale of former marital residence.
• Homestead tax exemption is evidence of homestead status.
• The former wife retained possession of the home following the divorce and continued to reside there with a child of the marriage.
• The final judgment ordering former husband to quitclaim his interest in home to former wife did not operate as a transfer.
• The constitution does not require that the owner reside on the property.
• Award of exclusion use and possession to the former wife did not extinguish husband’s rights.
• Homestead maintains its status until both the owner and the owner’s family alienate or abandon the residence.
In Friscia v. Friscia, the Second District held that the former marital home retained homestead status even though the husband no longer resided there. The court followed a thorough analysis of homestead status.
• Homestead is not part of the probate estate.
• Homestead that is not devised descends in the same manner as other intestate property, except when the owner is survived by a spouse or minor child.
• The exemption extends to the proceeds from a voluntary sale.
• Dissolution of marriage changed ownership to tenants in common between former spouses, but did not operate as a transfer of the husband’s interest in the home.
• Former husband’s protected interest in former marital home descended as provided in § 732.401 to current spouse and minor children.
• Mutual release provision in marital settlement agreement did not waive former husband’s homestead rights in former marital home.
• Waiver of “all rights” to property of the other spouse in marital dissolution proceedings was not a waiver of devise and descent restrictions.
• Provisions in marital settlement agreement for the ultimate sale and division of proceeds from sale of former marital home was not a waiver of the exemption from forced sale.
• A marital settlement agreement incorporated into a final judgment can constitute a waiver of homestead rights.
2. Fee Simple Ownership Not Required
The Fifth District Court of Appeals, in Southern Walls, Inc. v. Stillwell, noted that an individual claiming the homestead exemption “need not hold fee simple title to the property.” There, the court found that the exemption applied to a leasehold interest.
3. Beneficial Interest
In Heiman v. Capital Bank, the Third District Court of Appeals has ruled that a mere beneficial interest held by one spouse as to land titled in the other spouse’s name was sufficient to invoke the protections of homestead status. At the time, the Florida Constitution required ownership by “head of the household.” The wife owned a condominium in her sole name. The court found that the husband’s interest, based solely on his marital relationship to the owner, was sufficient to constitute an interest that was protected from forced sale.
4. Revocable Trusts
The law has evolved to treat ownership through a revocable trust very much the same as ownership by an individual. In Engelke v. Engelke, the court held that a one-half interest in property titled in a revocable trust can qualify as protected homestead. Section 736.0505(1)(a) that the protections against creditor claims are the same whether held in a revocable trust or owned directly by the settler of a revocable trust.
5. Lease for a Term of Years
Because the constitution does not require a particular title or estate in the homesteader’s residence, a leasehold interest in the underlying real property is sufficient for purposes of Article X, Section 4(a). In re Dean and In re McAtee, both bankruptcy cases, held that a leasehold interest is sufficient to qualify for the exemption from forced sale.
6. Leasehold Cooperatives
Leasehold cooperatives usually involve a not-for-profit corporation that holds legal title to the underlying land. Much like a condominium, owners are given rights to a “unit”, which can consist of a lease for 99 years or longer. The unit can consist of a surveyed lot or an apartment-type unit. The cooperative statutes in Chapter 719 are very similar to the condominium statutes in Chapter 718 and at one time were included within the condominium chapter. This form of ownership is authorized by statute, but the courts have rendered conflicting decisions on homestead issues.
• An interest in a leasehold cooperative is protected from the claims of creditors during the owner’s lifetime. Southern Walls, Inc. v. Stillwell.
• An interest in a leasehold cooperative is not subject to the restrictions on devise. Phillips v. Hirshon and In re Wartels.
• A creditor will likely argue that Phillips v. Hirshon overruled the Southern Walls decision, despite the fact that the Florida Supreme Court dismissed an appeal that could have resolved the conflict between the two cases. Therefore, both cases still stand.
• A creditor will also argue that the Geraci decision, discussed below, is limited to the condominium form of ownership, even though a leasehold was involved.
a. The Cooperative Act
The Cooperative Act, which became effective after Mr. Wartels died, provides two key definitions:
719.102(12) “Cooperative” means that form of ownership of real property wherein legal title is vested in a corporation or other entity and the beneficial use is evidenced by an ownership interest in the association and a lease or other muniment of title or possession granted by the association as the owner of all the cooperative property.
719.102(14) “Cooperative parcel” means the shares or other evidence of ownership in a cooperative representing an undivided share in the assets of the association, together with the lease or other muniment of title or possession.
These definitions include key concepts for the application of homestead protections, including ownership, muniment of title, beneficial use, title, and possession. A residential cooperative is defined as one with units that are intended for use as a “… private residence, domicile, or homestead….”
b. The Wartels Decision
Mr. Wartels died in 1974, owning a cooperative apartment that he shared with his wife. The home was titled in his name alone. After his death, his widow sought constitutional protection as a surviving spouse under of paragraph (c) of Article X, section 4. The Florida Supreme Court held that “homestead property must consist of an interest in realty,” citing Pasco v. Harley ; Hill v. First National Bank ; and Milton v. Milton . The Pasco, Hill, and Milton, decisions, however, did not hold that a leasehold interest is not an “interest in realty.” The Hill decision held that “[t]he exemptions ‘from forced sale under process of any court,’ of certain homestead property ‘owned by the head of a family residing in this state,’ have reference to the beneficial interests as owned by the head of a family in the specified classes of property.”
c. The Southern Walls Decision
In 2002, the Fifth District held that an interest in a leasehold cooperative is protected from the claims of creditors during the owner’s lifetime. The Fifth DCA distinguished Wartels and held that Wartels applied to the constitutional restrictions on devise, but not the constitutional homestead protection from forced sale.
In In Re Estate of Wartels, 357 So. 2d 708 ( Fla. 1978), the court held that a co-op is not homestead for purposes of the laws relating to devise and descent. However, in Ammerman v. Markham, 222 So.2d 423 (Fla.1969), the court held that a co-op may qualify as homestead for purposes of taxation. This dichotomy reveals that there is no definition of homestead that may be used with precision in all cases and that Wartels and Ammerman are not necessarily controlling regarding the issue of whether a co-op qualifies as homestead for purposes of exemption from forced sale under article X, section 4(a)(1).
The Florida Supreme Court declined to review Southern Walls.
d. Phillips v. Hirshon
In Phillips v. Hirshon, the Third District felt constrained to follow Wartels in a case involving constitutional restrictions on the devise of homestead in Article X, section 4(c). The Third District certified a conflict between Wartels and Southern Walls because they both examined the application of the same section of the Florida Constitution, but reached different results. After initially accepting jurisdiction, reviewing briefs, and hearing oral argument, The Florida Supreme Court dismissed jurisdiction. In an unpublished order dated April 17, 2008, the court stated:
We originally accepted jurisdiction to review Phillips v. Hirshon, 958 So. 2d 425 (Fla. 3d DCA 2007), pursuant to article V, section 3(b)(4) of the Florida Constitution. See Phillips v. Hirshon, 963 So. 2d 227 (Fla. 2007) (granting review). However, upon further consideration, we have determined that we should exercise our discretion to discharge jurisdiction in this cause. Accordingly, jurisdiction is discharged and this review proceeding is hereby dismissed.
e. Geraci v. Sunstar EMS
The Geraci decision marks the third opportunity for the Florida Supreme Court to review the conflict between Southern Walls and Wartels. At the district court of appeals level, the Second District declined to apply the holding in Wartels and instead focused on the policy behind the constitutional exemption from forced sale and the ownership interest involved.
In considering the exemption from forced sale, a court must instead “focus on the debtor’s intent to make the property his homestead and the debtor’s actual use of the property as his principal and primary residence.” In re Dean, 177 B.R. 727, 729 (Bankr.S.D.Fla.1995). When a lessee’s interest in a leasehold estate includes the right to use and occupy the premises for a long term and the lessee has made the residence his principal and exclusive residence, such an interest is entitled to Florida’s homestead exemption from forced sale. Id. at 729–30; see also In re McAtee, 154 B.R. 346, 348 (Bankr.N.D.Fla.1993) (finding a long-term lease to be subject to the exemption from forced sale because it constituted an interest in real property and was more than a “simple possessory interest”); S. Walls, 810 So.2d at 572 (finding a co-op to be subject to the exemption from forced sale because “a co-op owner owns the unit, pays valuable consideration for it, and has the right to the exclusive use and possession of it for the duration of the lease”). This construction of the homestead exemption from forced sale is consistent with “important public policy considerations such as promoting the stability and welfare of the state by encouraging property ownership and the independence of its citizens by preserving a home where a family may live beyond the reaches of economic misfortune.” In re McAtee, 154 B.R. at 347–48.
The Second District went on to distinguish Wartels:
We recognize that at least two courts have refused to so distinguish Wartels. See In re Lisowski, 395 B.R. 771, 777 (Bankr.M.D.Fla.2008) (concluding that, under Wartels, the homestead exemption from forced sale applies only to improved land or real property that is owned by the debtor); Phillips v. Hirshon, 958 So.2d 425, 430 (Fla. 3d DCA 2007) (holding that a co-op did not qualify for homestead exemption for purposes of descent and devise because it was not an interest in realty under Wartels). However, we do not find the reasoning of these cases persuasive because they do not adequately reconcile the supreme court’s decision in Wartels with the court’s jurisprudence extending the exemption from forced sale to other beneficial interests in land and not limiting the exemption to a fee simple interest.
The Second District Court of Appeals, on August 20, 2012, denied a Motion for Certification to the Florida Supreme Court.
The Supreme Court, however, initially accepted jurisdiction based upon a conflict between Wartels and Southern Walls and received initial briefs. In its initial brief, at page 26, the Agency for Health Care Administration argued that the decision in Geraci was in direct conflict with the decision in Philips v. Hirshon. After briefs were filed, the court dismissed jurisdiction on October 28, 2013, cancelling oral arguments scheduled for November 4, 2013. The order reads:
We initially accepted review of the decision in Geraci v. Sunstar EMS, 93 So. 3d 384 (Fla. 2d DCA 2012), based on express and direct conflict. See art. V, § 3(b)(3), Fla. Const. Upon further consideration, we have determined that we should exercise our discretion and discharge jurisdiction. Accordingly, we hereby dismiss this review proceeding.
f. What is the Current Law?
The Florida Supreme Court has had three opportunities to overrule Southern Walls and hold that Wartels applies to cases involving the constitutional exemption from forced sale. The application of Wartels appears to be limited to cases under paragraph (c) of Article X, section 4 involving restrictions on the devise of homestead, or perhaps to cases involving deaths prior to the enactment of the Cooperative Act. The Florida Supreme Court has not overruled, distinguished, or receded from Wartels. At the same time, however, the court seems to accept the application of the protection from forced sale under paragraphs (a) and (b) of Article X, section 4 to leasehold cooperative units.
• As the law currently stands, a leasehold cooperative unit is not subject to constitutional restrictions on devise,
• but still enjoys the constitutional protection from creditor claims, both during the owner’s lifetime, and upon devise to persons who qualify as heirs.
7. Life Estate and Remainder
A life estate has been recognized as qualifying for the protection against creditor claims under Article X, Section 4(a). King v. King. A remainder interest, however, is not subject to immediate possession, so the protection under section 4(a) would not be available for the holder of the remainder interest as protection against the interest held by the remainderman.
B. Bankruptcy Proceedings
Florida is an “opt-out state,” meaning that certain state law exemptions apply in bankruptcy proceedings. The following requirements affect creditor protection in Bankruptcy proceedings for Florida residents.