3d DCA: Does homestead property in marital trust lose its creditor protection?
Aronson v. Aronson, --- So.3d ----, 2010 WL 4226204 (Fla. 3d DCA Oct 27, 2010)
In July of 1996 Mr. Aronson deeded his condo (located on Key Biscayne, FL) to his revocable trust. Upon Mr. Aronson's deth, his revocable trust created a life-time irrevocable marital trust for his spouse, remainder to his sons from a prior marriage. A few months later, in December of 1996, Mr. Aronson deeded this same condo directly to his spouse. This was a lawsuit waiting to happen.
Back in 2006, Mr. Aronson's sons scored a victory when the 3d DCA ruled the deed their dad originally executed transferring his condo to his trust controlled, thus ensuring they would receive the condo upon surviving spouse's death [click here]. Surviving spouse promptly fired back, filing suit to enforce all of her rights to the condo under the terms of the marital trust. This time around surviving spouse came out on top.
In the linked-to opinion above spouse sued for reimbursement of all of the condo-related expenses she had paid with her own funds and also for payment of all of her mandatory principal distribution rights under the marital trust. Because the trust owned only one asset (the condo), there's only two ways spouse could be made whole: [1] sell the condo and pay her from the sales proceeds or [2] transfer a % the condo's ownership interest to her. The sons wanted to go with option 1 (which would result in wife getting booted out of her home), spouse wanted to go with option 2. The sons won at trial, but lost on appeal. In an opinion that should be of interest to all estate planners, the 3d DCA ruled homestead property held in a marital trust does NOT lose its creditor protection, even if the creditor you're protecting against is the spouse:
[T]he trial court reasoned that because any sale would be for the purpose of paying a debt owed to the widow, Article X, Section 4 of the Florida Constitution would not bar the sale. Section 4(b) of Article X specifically states that the exemption from forced sale inures to a decedent's surviving spouse. There are only three recognized exceptions to this exemption, none of which apply here. See In re Adell, 321 B.R. 562, 571-72 (Bankr.M.D.Fla.2005). Accordingly, since the trial court erred in denying declaratory judgment on the homestead protection, we reverse on this point.
This case is noteworthy because it confirms once again that homestead property held in trust does NOT lose its creditor protection. As I previously explained here, the reason why opinions like this one are especially interesting to estate planners is because they chip away at the precedential value of In re Bosonetto, 271 B.R. 403 (Bankr.M.D.Fla.2001), a much-criticized Middle District Bankruptcy Court opinion ruling that homestead property held in trust lost its creditor protection.
I could not find a discussion about the application of Article X, section 4(c)to the marital trust. It did not leave the spouse a fee simple interest in the decedent's homestead. Unless there was a postnuptial or prenuptial agreement, the attempted devise of any interest in the homestead short of a fee simple interest would fail. The widow would have then received a life estate under section 732.401 and the trust would have no bearing on the ownership.
I'd agree that the widow's life estate could qualify for the exemption from forced by the decedent's creditors, and also against forced sale by the widow's creditors as long as it was her primary residence under Article X, section 4(a) and (b). The life estate would not be subject to a forced partition action by the decedent's sons.
Hoping that the case would not go through years of litigation without consideration of Article X, section 4(c), I'm assuming there must have been a postnuptial or premuptial agreement waiving the widow's rights under Article X, section 4(b).
I understand and agree with the idea that a homestead owned by a REVOCABLE trust is still homestead. However, I do not understand how a home owned by an IRREVOCABLE trust is the homestead of the person living in the home. The home should be protected from the widow's creditors because the Trust, not the widow, owns the home. This should preclude homestead treatment. The case does not discuss this issue.
Second, the exemption from forced sale prevents the home from being sold and using the proceeds to pay a creditor. That happened in this case. However, the court ordered fractional interests in the home to be distributed to the creditor! That worked only because the creditor was the person living in the home. This is not the asset protection usually associated with homestead protection.