A Guide to Florida Homestead Laws & The Benefit of QPRT's

The information below is for informational purposes only and does not constitute accounting or tax advice. Persons receiving information through this article should not act or rely upon this information without consulting their own accountants or tax advisors.

The rules for Homestead protection are complex it is advisable to seek professional guidance with a CPA, Accountant, & Real Estate professional before proceeding in your respective state.

Homestead exemption and protection can be an immensely valuable technique for protecting one of, if not your most important real estate asset, your personal residence, from the claims of others.

To start with a little history; homestead exemptions were actually first brought about in Texas in the late 1830's to entice settlers to leave the US and settle on what was then known as the Republic of Texas to develop the land and farm it. This economic development tool worked like a charm and drew in farmers from the US and Europe during the 1870's and 80's since they were able to ensure the protection of their land from creditors through Homestead Protection.

Each respective state has different economic development strategies and in turn different Homestead Exemption laws. And while the size of the property in acres is generally limited, Texas, Florida, Kansas, Iowa, and Oklahoma allow homesteads for an unlimited dollar amount. While other states such as Delaware, New Jersey, and Pennsylvania have no homestead exemptions. The property that Florida Homestead protects is as follows: "Real or personal property including mobile or modular home to unlimited value; cannot exceed half acre in municipality or 160 acres elsewhere; spouse or child of deceased owner may claim homestead exemption (husband and wife may double exemption)"

The main question to most individuals becomes: When is your Florida property considered to be a homestead so that it qualifies for all the protections and restrictions offered by Florida homestead laws? The simple answer here is: you and your home must meet three criteria.

When a Home Is Considered Your Florida Homestead

You must have legal or beneficial title to the home on January 1 of the year in question, and you must reside at the home as your permanent residence. The third qualifier is that you must apply for the homestead exemption in person at the property appraiser's office in the county where your home is located between January 1 and March 1 of the year in which you are seeking the homestead exemption.

Homestead status generally stays in place until you inform the property appraiser's office that the property is no longer your Florida homestead. Some counties send a letter or postcard to remind you that you're required to let the property appraiser's office know when your home is no longer your homestead.

Florida homestead laws fall into three different categories: real estate taxes, creditor protection, and death, descent, and distribution.

Real Estate Taxes

Your Florida homestead is entitled to receive certain exemptions from real estate taxes. The Florida Department of Revenue's website provides a complete list of these exemptions. Under Florida's "Save Our Homes" cap on assessments, the annual valuation of your homestead for property tax purposes can only increase by the lesser of 3 percent or the percentage change in the Consumer Price Index for the prior year. This generally leads to significant savings on your real estate taxes the longer you own your homestead property.

Creditor Protection

Florida law provides that a judgment holder cannot force you to sell your homestead to pay off the judgment if someone sues you and obtains one against you. This protection from judgment creditors also carries over to certain heirs who might inherit your homestead after you die, including your spouse, children, siblings, nieces, and nephews. Unfortunately, any judgments specific to the property, such as foreclosures, past due association fees, and contractors’ liens, will trump homestead protection.

The Florida Homestead Protection policy protects homeowner by and far to the greatest extent. The Florida Supreme Court ruled that converting nonexempt property (cash, or any property subject to immediate seizure) into an unlimited exempt homestead (a multimillion dollar home situated on one acre of land or less) is perfectly alright, even if the purpose is to "defraud" or protect assets from an existing creditor.

Death, Descent, and Distribution

The third and probably most confusing concept with regard to Florida homesteads is the restriction that Florida law places on who can receive your Florida homestead when you die.

The answer depends on whether you were married at the time of your death and whether minor children survived you. If you are not survived by a spouse or any minor children, you can leave the homestead to whomever you please. You can disinherit one adult child in favor of another or disinherit your adult children entirely in favor of a sibling or a friend.

Married with a minor child. If you are survived by a minor child and you're married, and if your homestead is titled in joint names with your spouse, you can leave your protected homestead to your spouse through rights of survivorship.

Single with a minor child. But what if you're a single parent and the homestead is titled in your name solely? A law went into effect on Oct. 1, 2010, allowing a single parent of a minor child to establish a special type of irrevocable trust for the minor child's benefit until an age selected by the parent.

This avoids the need to set up a guardianship for the minor, and it gives the parent control over when and how the child will inherit the homestead. But this special type of trust must be irrevocable and should only be established with the help of an estate planning attorney. Irrevocable means that after you form it, you can't legally undo it.

Married with spouse as sole survivor. What happens if you are survived by a spouse? Then—at least up until Oct. 1, 2010—if you did not leave your homestead to your spouse outright and without any strings attached, she would automatically receive what is known as a "life estate" in the homestead. While your surviving spouse would have the right to live in the property for her remaining lifetime, she would also have to pay all the property taxes and the insurance necessary to maintain the residence.

Married with adult children. If you are survived by a spouse and you have adult children, they would receive the estate in equal shares after your spouse dies, if the life estate applies. If your spouse has elected to live in the property for the remainder of her life, she couldn't force the children to sell the property, but your children couldn't force her to sell it either.

Effective Oct. 1, 2010, the surviving spouse who is initially stuck with a life estate in the homestead can elect to divide the property so that she will receive one-half and the children of the deceased spouse will equally divide the other half. She must make this election within a limited period of time after the deceased spouse's death, however.

So, yes, Florida homestead laws are tricky and multilayered. If you have minor children or are considering using your second home in Florida as your primary, permanent residence, make it a point to sit down with a Florida attorney to ensure that you've planned appropriately.

Qualified Personal Residence Trusts to Protect Your Home

Another protection and tax savings device to be used in tandem with Homestead protections is a QPRT (Qualified Personal Residence Trust). This trust has complex regulations and can be difficult to explain in simple terms so please do your research and work with a professional. A QPRT is a special type of trust allowed by IRS regulations (26 C.F.R. 25.2702-5.). Essentially a QPRT is an estate planning tool to transfer mom or dad's (or both's) residence from their estate at a low gift tax value. A gift to the QPRT of mom or dad's home (usually to children or family members) removes all residences from the settlor's estate, thus reducing the potential tax liabilities at the settlor's death.

In the situation under a QPRT the settlor will transfer their personal residence (homestead protection can be passed as well as mentioned above) into an irrevocable trust, while retaining the right to reside in the residence for a period of time. The settlor makes a taxable gift when the property is transferred to the trust, if dad or mom survives to the end of the trust term the ownership would then be transferred to the beneficiaries. Once this has occurred and the trust has been funded with the residence, that residence and any future appreciation is excluded from their estate, this can be a great item if the value of the home is rising over the years.

IRS regulations state that an individual is permitted to create 2 QPRT's one being for their principle residence and the second for an occasional residence or vacation home. An important item to note is if mom or dad (settlor's) pass away during the fixed year schedule then the entire value of the property would be includable in their estate. In this situation nothing would have been accomplished, however nothing has been lost either.

The tax benefit of the QPRT resides in the fact that when the home is transferred the taxpayer does not pay gift tax on the full market value. Instead this amount is computed on the property value reduced by the value of the interest that the taxpayer has retained.

Since this article is in regards to asset protection in Real Estate we will dig into a bit of how a QPRT can protect against judgements. As an irrevocable trust once the settlor's personal residence or vacation home is gifted to a QPRT the QPRT is viewed as a separate person. Due to this a judgement against the QPRT creditors could not encumber the property that was transferred to the QPRT, as long as the transfer occurred prior to the settlor's being sued. For asset protection and tax savings in Florida it doesn't get any better than blending Homestead Protection and QPRT's.