C. Fla. Bkrptcy Court Nixes Trustee's Overly Legalistic Interpretation Of State Homestead Law In Failed Attempt To Snatch Family Home Away From Debtor

From a recent post on the Florida Asset Protection Blog:

• Can a debtor protect a future legal interest in his primary residence under Florida homestead laws? In this bankruptcy case a debtor’s mother owned a property where the mother and the debtor resided with the debtor’s spouse and children. The mother executed a deed transferring title to the debtor reserving a life estate to the mother. (A "life estate" means the mother owns and controls the property and as long as she is alive). The debtor’s mother was old with a short life expectancy.

• The debtor filed Chapter 7 bankruptcy and claimed his future legal interest in his mother’s house as an exempt homestead asset. The trustee objected to the debtor’s exemption because the debtor’s interest in the property was only a future "remainder interest" [...]. The trustee wanted to take and sell the debtor’s interest in the house which would vest upon his mother’s death in the reasonably near future.

• The court said that the debtor’s future ownership rights was protected under Florida’s homestead laws. The court pointed out that the debtor occupied the home with his family as a family residence, and that the debtor contributed financially to the repairs and upgrades to the house. The court held that the debtor’s present right of possession is sufficient to qualify the house as an exempt homestead.(1)(2)

Source: Future Interest In Residence Protected From Current Creditors And Bankruptcy Trustee.

For the court ruling, see In re: Williams, Case No. 3:09-bk-586-PMG (Bankr. M.D. Fla., Jacksonville Div., March 31, 2010).

(1) In reaching its conclusion, the court made the following, among other, observations regarding the application of the homestead exemption against forced sale under Article X, Section 4 of the Florida Constitution with respect to those Florida residents holding a remainder interest in real estate (aka "remaindermen") within the state (bold text is my emphasis, not in the original text):

• Allowance of the homestead exemption to remaindermen who occupy the property as their home in circumstances such as this is consistent with the Constitution's emphasis on the residential use of exempt property. "The availability of the homestead exemption is not dependent upon any strict or legalistic interpretation of the quality and nature of the property or of the quality of the debtor's title. The Court must instead focus on the circumstances and 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).

• "[E]ven if she merely retained possession of the land, it is of sufficient value to her to have it protected under the homestead law, and it is of no concern to the creditor that another has the superior title." Hill v. First National Bank of Marianna, 75 So. 614, 617 (Fla. 1917). "Actual 'family' occupancy and the intention to continue occupying the home have been held to be the key qualifications for homestead status and the protections deriving from that status under the Florida Constitution." Edward Leasing Corporation v. Uhlig, 652 F.Supp. 1409, 1412 (S.D. Fla. 1987). See also Southern Walls, Inc. v. Stilwell Corporation, 810 So.2d at 572.

• Allowance of the homestead exemption to remaindermen who reside on the property in circumstances such as this is also consistent with the historically liberal construction of the exemption which favors the protection of the family home. Southern Walls, 810 So.2d at 569-70. The allowance promotes the constitutional purpose of securing a home to the householder, so that the homeowner and his family can live beyond the reach of financial misfortune. Snyder v. Davis, 699 So.2d at 1002.

• Finally, it is also noteworthy that Courts in other jurisdictions have allowed remaindermen to exempt their interests in property on which they resided. In In re Cain, 235 B.R. 812 (Bankr. M.D. N.C. 1998), for example, the Court allowed a remainderman to claim a homestead exemption for property in which he had resided for a year. In construing North Carolina law, the Court stated:
  
  There is nothing in the statute which explicitly precludes the exemption claimed by the Debtor. Under the wording of the statute the Debtor must own an interest in the real or personal property in which the exemption is claimed. There is no limitation or restriction in the statute regarding the nature or extent of the interest which must be owned. . . . The next requirement under the statute is that the real or personal property in which the debtor owns an interest must be used as a residence by the debtor or a dependent of the debtor. This is the only requirement under the statute which is related to possession of the property and the only possessory interest required is that either the debtor or a dependent of the debtor use the property as a residence. There is nothing in the statutory language which requires that the debtor's use of the property be a matter of right based upon the debtor being the sole owner of a fee simple absolute title to the property.

• In re Cain, 235 B.R. at 816-17 (Emphasis supplied). See also In re Kimble, 344 B.R. 546 (Bankr. S.D. Ohio 2006)(the debtor's remainder interest in property occupied under an oral lease with his mother qualifies for the exemption provided under Ohio's homestead law), and In re Eskew, 233 B.R. 708 (Bankr. W.D. Texas 1998)(the debtors' reversionary interest in their residential property was properly claimed as exempt under Texas homestead law).

(2) For those desiring to transfer a remainder interest to an adult child as was done in this case, use of a "Lady Bird Deed" (ie. an enhanced life estate deed) to make the conveyance would accomplish the transfer and, at the same time, avoid all the complications that may arise if the adult child subsequently gets into hot water with creditors (or, as in this case, a bankruptcy trustee). It has been described as working like a traditional Life Estate Deed, but going beyond a life estate deed, because not only does the life tenant get to live there for life, that former owner also reserves more than just a life estate. Also reserved are the rights to sell, commit waste, and almost everything else, except the transfer on death to the "remainderman". In effect, the remainderman is being treated for some purposes as holding only a contingent remainder interest in the subject property for as long as the holder of the life estate is alive. Use of this specially designed instrument is not available in all states.

See also:

• Lady Bird Deed (Texas),
• Lady Bird Deed not just for Medicaid,
• Enhanced Life Estate Deed, Ladybird Deed,
• Ladybird Deed (Florida),
• The Difference Between the Enhanced Life Estate Deed, Warranty Deed and Quitclaim Deed.

Go here for other links for Lady Bird Deeds.