Conditional LIfe Estate Protected Under Homestead Law

A client lived in a home titled in the name of his father’s living trust. The client had previously owned the home and then transferred the house to his father’s trust. The deed reserved to the client a life estate in the home that his father could terminate at any time in his sole discretion. The client wants to know if his interest is protected by Florida homestead law under his father’s trust agreement.

Florida homestead law protects any interest a debtor has in his primary place of residence. Homestead applies to equitable interests as well as legal title, and it covers interests that are less than full fee simple title. Life estates are protected under Florida homestead. A debtor cannot be divested of the right to reside in his home during his lifetime. At his death, the interest is extinguished so there is nothing subject to his creditors’ claims against the debtor’s estate.

In this instance, the client’s homestead rights are determined by the transfer deed, not the provisions of the trust agreement. The trust has no interest in the homestead during the client’s lifetime. If the father, as trustee, exercised his right to terminate the life estate then the property would be owned by the trust in fee simple. The client would become a tenant at will in the father’s house. The client’s creditors would then have nothing to get from the client’s residence because the client would have no interest subject to levy other than a month-to-month tenancy.

The client did not explain why he and his father arranged for the house ownership in this manner. Why would the client transfer a house he had paid for to this father’s trust reserving a life estate subject to cancellation. I infer that the father and son did not understand the homestead exemption and thought they were protecting the house form the son’s future creditors by getting the house out of the son’s name.

This complicated arrangement had some unnecessary risks. The father’s trust had a future interest in the house because the father would own the house after the son’s death. If the father were sued the creditor might try to attack the father’s future interest. The father’s future interest would increase his taxable estate if the father were subject to estate tax. Also, the father controlled what would happen to the house after the son died, and the father could decide to bequeath the interest to people other than the son and his descendants.

A basic principle of asset protection is the simple plans are the best plans. This family created a confusing ownership arrangement for a home that was already protected from the son’s creditors.