A person who claims a domicile in Florida is privileged to have the greatest protection device available anywhere in the country–a homestead protection from creditors. Unlike most states the homestead protection provided to a Florida resident is constitutionally provided and is unlimited in value. The only substantial limitation involves a geographic limitation of ½ acre within a municipality and 160 acres outside a municipality. This homestead protection is so substantial it has caused an influx of debtor’s to Florida (O.J. Simpson, Enron executives, etc.).
Due to the unlimited value of the homestead exemption the first blunder involving protecting the homestead from creditors is having an encumbrance or mortgage on the property. This exemption does not apply to a mortgagee of a mortgage granted by the homeowners. The mortgage might arise when the property was first acquired or placed on the property to secure other borrowing (maybe to fund the medical practice or to secure a line of credit). As soon as possible, the balance owed on the mortgage should be fully paid. Some advisors have suggested that maintaining a mortgage on the property is advisable in order to allow last minute payoffs of the mortgage with unprotected assets (a conversion of non-exempt assets into the homestead exempt asset even as a fraudulent transfer is permissible under the recent state supreme court case of Havoco America. Ltd. v. Hill, 790 So.2d 1018 (Fla.2001). However, a conversion of this nature within ten years of filing of bankruptcy will be likely accessible to creditors in bankruptcy as a fraudulent transfer. One of the tenants of asset protection planning is never foreclose the opportunity to declare bankruptcy to wipe out the judgment creditor.
The second major blunder involving the homestead involves titling the homestead in an entity that may not clearly benefit from the homestead constitutional protection. In a fairly recent bankruptcy case (In re Bosonetto, 271 B.R. 403 (Bkrtcy.M.D.Fla., 2001), the bankruptcy judge held that since the constitutional protection describes a “natural person” receiving the homestead protection, a revocable inter vivos trust would not qualify. While other state courts have held that the homestead protections apply in circumstances where the title to the property is not legally owned by a “natural person” (see Callava v. Feinberg, 864 So.2d 429 (Fla.App.3 Dist., 2003) where the state court held that an equitable interest in a residence was sufficient for homestead purposes), this issue is in doubt if a debtor wants to utilize the ultimate bankruptcy solution. Thus, until a bankruptcy court has specifically ruled that a trust ownership for the benefit of a “natural person” qualifies for homestead, title on the residence must be in the sole name of the individual (or if married then should be in the joint names).
This leads us to the third greatest blunder involving the homestead, not taking full advantage of tenancy by the entireties ownership to the residence. When real estate is held solely by a husband and a wife with rights of survivorship and with an intent to hold the property as TBE, then an individual creditor of husband or wife can not attach the property. Thus, if properly titled a principal residence might have two debtor protections: homestead and TBE protection. The second tenant of asset protection is always try to double the layers of protection. However, some advisors (especially real estate attorneys) argue that a title to the property between husband and wife is presumed in Florida to be TBE property. The problem with this thinking, is that a presumption is not definitive and is subject to dispute in litigation. Which brings us to the third tenant of asset protection–avoid litigation and attorneys at all costs (studies indicate that for most malpractice claimants more is spent on litigation costs then in actual recoveries by injured parties). To avoid having to prove in a courtroom that the property is held as TBE, the deed to the property should read as follows:
“John Smith and Mary Smith, his wife, as tenancy by the entireties”.
The fourth major blunder involves not obtaining an open line of credit secured by the homestead for the full equity value in the residence. When disaster strikes (a malpractice claim is filed) having instant access to the equity in the homestead is crucial for four reasons:
- A physician’s desire in practicing medicine wanes and cash needs might increase.
- The physician needs resources to pay possible legal expenses or settlements.
- Liquidity in a form which creditors can not reach (advances on a line of credit is non-attachable) is crucial.
- Having to sell a residence to raise capital presents greater emotional and financial hardships to the then distraught physician.
The final blunder involves obtaining the open line of credit with the same lending institution that is involved in the physician’s practice or other properties which are not exempt from judgment creditors. This problem of using the same lender on multiple lines of credit or other secured obligations gives rise to a “marshaling of assets” attack by a malpractice claimant. Under this well established doctrine of creditor law, a creditor who can only recover against one asset owned by a debtor can force another creditor who has access to multiple debtor assets to go after the other assets. Thus, if a malpractice claimant can only access the accounts receivable in a medical practice and the physician’s lender could access the homestead (under the line of credit) and the accounts receivable, then the malpractice creditor can force the lender to go after the homestead property. While most attorneys (including lender attorneys) and lending institutions are unfamiliar with this theory it still rears its ugly head in recent court cases (see Walter T. Embry, Inc. v. LaSalle Nat. Bank, 792 So.2d 567 (Fla.App. 4 Dist.,2001). Thus, it is crucial that a physician utilizes different lenders involving the homestead from other assets.
In conclusion, many errors are made in protecting the most important asset a physician will own–their castle. To learn more on protecting these other assets, consider the seminars that our firm offers on DVDs or videotapes. In addition our firm now has a new seminar “Homestead Protection After Bankruptcy Reforms” available on DVD (please call 561-967-2772 for further information).
