Assignment of Homestead Insurance Proceeds Allowed

 

In a recent case, an owner of homestead property assigned post-loss insurance benefits to a third-party contractor. The  insurance company challenged the assignment, asserting it was not allowed by Article X, section 4(c) of the Florida Constitution - apparently not an authorized alienation of a homestead interest by mortgage, sale or gift. Reversing the trial court on a motion for summary judgment, the Fifth District Court of Appeal held that the Florida Constitution does not bar such an assignment.

 

Article X, section 4(c) provides in relevant part that "[t]he owner of homestead real estate, joined by the spouse if married, may alienate the homestead by mortgage, sale or gift." The appellate court appears to base its holding on an assignment of post-loss insurance benefits not constituting an "alienation" of the homestead - as such, section (4)(c) does not apply and there is no prohibition. Under Black's Law Dictionary, alienation is defined as the conveyance or transfer of property to another. Since the assignment here was not a transfer of real property, then there was not a transfer of title to real property  - thus, there is no alienation subject to section 4(c).

 

This seems off the mark to me. Insurance benefits relating to damage to a homestead are recognized as protected homestead property. Orange Brevard Plumbing & Heating Co. v. La Croix, 137 So. 2d 201 (Fla. 1962); Quiroga v. Citizens Prop. Ins. Corp., 34 So. 3d 101 (3rd DCA. 2010). Black's says that an alienation is the transfer of property. Clearly, the insurance proceeds are property. Are they being transferred? That would appear to be the case, as there was an assignment of the proceeds. Thus, there is an alienation of homestead property and the limitations of section 4(c) should apply.

 

While not focused on in the opinion, section 4(c) of Article X does use the terminology "homestead real estate" (emphasis added), and not just the single work "homestead" as used elsewhere in section 4. Perhaps this is the basis of the court's reading that section (4)(c) only applies to a transfer of title to real property, notwithstanding case law that treats insurance proceeds from the damage of homestead real property as being homestead property. However, note that section 4(c) also uses the shorthand phrase "homestead" without "real estate" four times, including in the sentence addressing alienation by mortgage, sale or gift - so it is uncertain if the alienation provision relates only to real estate. Even if the intent was to describe real estate alienations in that provision, the equating of damage insurance proceeds to the homestead property itself (which is of course real estate) would mean that the alienation restriction should likewise apply to the insurance proceeds. Thus, we have here both an alienation (i.e., transfer of property) and the transfer being of constitutionally protected property.

 

Note that the appellate court did not believe Article X, section 4(a) of the Florida Constitution to be involved. That provision prohibits a lien from being imposed against homestead property except in the circumstances listed therein (as well as protecting from forced sale). The court did not interpret the assignment as creating a lien. Note that section 4(a) and section 4(c) do interrelate - while section 4(a) prohibits a lien, section 4(c) authorizes a mortgage. Thus, section 4(c) operates in part as an exception to section 4(a), at least if one reads a mortgage as imposing a lien. Section 4(a) also does not allow its prohibitions to be waived through an unsecured agreement.  While at first glance one might believe the cases of Chames v. DeMayo, 972 So. 2d 850 (Fla. 2007) and  Quiroga to have direct relevance to this case, the appellate court noted that those cases relate to liens under section (4)(a).

 

The appellate court appears to have some doubt on the issue, since it certified the following question to the Florida Supreme Court as one of great public importance:

 

Does Article X, section 4(c) of the Florida Constitution allow the owner of homestead real property, joined by the spouse, if married, to assign post-loss insurance benefits to a third-party contractor contracted to make repairs to the homestead property?

SPEED DRY, INC. V. ANCHOR PROPERTY AND CASUALTY INSURANCE COMPANY, 5th DCA, Case no. 5D19-3055 (August 21, 2020)

GRANTOR TRUSTS OWNING AN ANNUITY

 

The income tax treatment of annuities is provided for under Code § 72. That section provides various rules, including extra income tax for some distributions to younger taxpayers and limits on deferral for entity  owners. The provisions can be difficult to interpret when the owner of the annuity is a grantor trust, and the annuitant and current beneficiary of the trust is not the grantor. A recent private letter ruling gives the IRS’ take on some of these issues. The following conclusions are based on the above scenario – a grantor trust is the owner of the annuity, and there is a current beneficiary that is not the grantor and whose life is the measuring life for the annuity.

1. Code § 72(q) 10% additional tax on early distributions. This provision imposes a 10% addition to tax if a distribution from the annuity is made on or after the taxpayer attains age 59 ½ , but with exceptions for a disabled taxpayer, or if the distribution is part of a series of substantially equal periodic payments made for the life of the taxpayer or the taxpayer and his or her designated beneficiary. The PLR provides that the grantor, since the grantor is treated as owner of the trust under the grantor trust rules, is the “taxpayer” for purposes of the foregoing age, disability, and equal periodic payment exceptions to the 10% addition to tax rules under Code § 72(q).
   
2. Code § 72(q)(2)(B) exception to 10% additional tax for death. This provision provides an exception to the 10% additional tax if the distribution is made on or after the death of the “holder” or, when the “holder” is not an individual, the death of the primary annuitant. The PLR provides that the “holder” is the grantor trust. Since it is not an individual, this exception applies to distributions after the death of the primary annuitant. That primary annuitant is the individual beneficiary (not the grantor), so distributions after the death of that beneficiary are not subject to the 10% addition to tax.
3. Code § 72(u)(1) nondeferral to trust owners. This provision denies tax deferral for an annuity contract that is not owned by a natural person, although it does allow for a trust or other entity to hold the annuity as an agent for a natural person without running afoul of the loss of deferral. The PLR concludes that this provision does not apply where the grantor is a natural person. The reasoning is somewhat strained, but taxpayer friendly. It reads the exception to the rule to apply to a trust for a natural person (without regard to the “as an agent” language since that language only applies to entities other than a trust). Since the grantor is treated as owning the trust assets, it is treated as the owner of the contract. The grantor trust is holding the contract (as holder) for the grantor, who is a natural person. Thus, income tax deferral is allowed. The PLR notes that Code § 72(u) was adopted to encourage employers to offer benefits to employees under qualified plans (by stripping corporate nonqualified annuity plans of income tax deferral). So for private trust arrangements not in the employment context, there is no policy reason to deny deferral.

PLR 202031008, July 31, 2020