New Homestead Laws in Florida

In its most recent legislative session, the Florida legislature enacted a number of additions and modifications to Florida statutory law relating to Florida's homestead exemption. These provisions can be summarized as enhancing or clarifying the exemption. The following is a summary of the new provisions, along with some excerpts.

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 736.0201(7): A proceeding to determine the homestead status of real property owned by a trust may be filed in the probate proceeding for the settlor’s estate if the settlor was treated as the owner of the interest held in the trust under s. 732.4015. The proceeding shall be governed by the Florida Probate Rules.

This provision provides jurisdiction to the probate court in a probate proceeding of a revocable trust settlor to determine the homestead status of real property owned by a trust. This should only apply to revocable trusts defined under Fla.Stats. § 733.707(3) and not other trusts, per the reference to Fla.Stats. § 732.4015. Fla.Stats. § 732.4015 references Fla.Stats. § 733.707(3). Generally, a revocable trust described in Fla.Stats. § 733.707(3) is one which the grantor has a right of revocation at death. Fla.Stats. § 733.707(3)(e) defines a “right of revocation” for this purpose as the power to amend or revoke the trust and revest the principal of the trust in the decedent, or withdraw or appoint the principal of the trust to or for the decedent’s benefit.

This provision was added due to a perceived lack of apparent authority for the probate court to otherwise make that homestead determination in these circumstances. Bill Analysis and Fiscal Impact Statement, to CS/CS/SB 1070 dated April 15, 2021, Page 5.

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 736.1109 (1): If a devise of homestead under a trust violates the limitations on the devise of homestead in s. 4(c), Art. X of the State Constitution, title shall pass as provided in s. 732.401 at the moment of death.

The constitutional restrictions on the devise of homestead are not defeated via ownership of the homestead of a decedent in a trust, subject to statutory carve-outs. This provision clarifies that if there is an improper testamentary devise in the trust, the property will pass to the same recipients who would receive it as if the decedent died owning the property directly and had attempted an invalid testamentary devise - that is Fla.Stats. § 732.401 of the Probate Code would apply, and the title passage occurs at the moment of death even though titled in the trust.

The provision applies only to revocable trusts and testamentary trusts. 

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 736.1109 (2) A power of sale or general direction to pay debts, expenses and claims within the trust instrument does not subject an interest in the protected homestead to the claims of decedent’s creditors, expenses of administration, and obligations of the decedent’s estate as provided in 736.05053.

If a trust holds an interest in a decedent’s protected homestead at death, this provision codifies a parallel probate result which applies to directly owned homesteads, such that a general power of sale or direction to pay debts, expenses, and claims of the decedent in the trust instrument does not in and of itself make the homestead subject to claims of the decedent’s creditors, expenses of administration, and obligations of the decedent’s estate.

The provision applies only to revocable trusts and testamentary trusts. 

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 736.1109(3) If a trust directs the sale of property that would otherwise qualify as protected homestead, and the property is not subject to the constitutional limitations on the devise of homestead under the State Constitution, title shall remain vested in the trustee and subject to the provisions of the trust.

Homestead property owned by a decedent that is protected homestead (i.e., it is directed to pass to an heir) and that is devisable, passes automatically at death to the recipient heir(s) and is not part of the probate estate. However, that is not the case if the decedent’s last will requires that property be sold and the proceeds to be divided among the heirs of the decedent or applied to estate obligations.

This provision extends this principle to when a trust owning the property has the direction for sale - in that circumstance, the trustee retains title to the property, and it does not pass automatically to the designated heir(s). 

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 736.151 Homestead property.—

(1) Property that is transferred to or acquired subject to a community property trust may continue to qualify or may initially qualify as the settlor spouses’ homestead within the meaning of s. 4(a)(1), Art. X of the State Constitution and for all purposes of general law, provided that the property would qualify as the settlor spouses’ homestead if title was held in one or both of the settlor spouses’ individual names.

(2) The settlor spouses shall be deemed to have beneficial title in equity to the homestead property held subject to a community property trust for all purposes, including for purposes of s. 196.031.

This provision is part of the new community property trust provisions of the Florida Trust Code. They seek to allow homestead protections to homestead property held in a community property trust. 

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 736.1104. Person Killer not entitled to receive property or other benefits by reason of victim's death --

(3) A beneficiary of a trust who was convicted in any state or foreign jurisdiction of abuse, neglect, exploitation, or aggravated manslaughter of an elderly person or a disabled adult, as those terms are defined in s. 825.101, for conduct against a settlor or another person on whose death such beneficiary's interest depends is not entitled to any trust interest, including a homestead dependent on the victim's death, and such interest shall devolve as though the abuser, neglector, exploiter, or killer had predeceased the victim.

This provision will void transfers of homestead interests in trusts where the recipient is convicted of neglect, exploitation, or aggravated manslaughter. What happens if the surviving spouse is the person so convicted? Does the spouse lose the interest if it was devised to the spouse under the trust? It would appear that the trust transfer is void, but would the Florida Constitution limits on devise when there is a surviving spouse restore the transfer to the trust? Interestingly, the Constitution does not directly provide that the spouse succeeds to the interest - this incurs under Florida statutory law. That being the case, does this mean that this provision can be interpreted as also overriding the statutorily required transfer to the surviving spouse in the event of a prohibited devise, and/or does the Florida Consitution nonetheless still require passage to the surviving spouse since it is the spouse that the constiutional interest seeks to protect (in addition to the protection of minor children)?

Note that a surviving spouse is entitled to the decedent’s homestead under the Florida Constitution (wholly, or in part, if there are surviving minor children), such that presumably this statutory provision does not void that spouse’s interest if they are the person so convicted. 

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 Changes to Fla.Stats. Section 196.075.

This statute is modified to avoid the need for representations of income beyond the first year of exemption in regard to the additional homestead ad valorem exemption to persons 65 or older at lower income levels. 

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 Changes to Ad Valorem Valuation of Homesteads. 

Chapter 2021-31 (H.B. No. 7061) made several changes to Florida Statutes regarding the ad valorem value of homestead interests, principally:

 1. Adding  new exceptions to the rule that ad valorem values are adjusted upon a change of ownership when the change or transfer is the removal from the title of a co-tenant holding title by joint tenancy with right of survivorship when the other co-tenants remain on the title. Such removal may be by instrument or the death of the co-tenant. 

2. Relating to adjustments in value of damaged property. 

3. Relating to adjustments in value of voluntarily elevated property. 

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 Change to Fla.Stats. Section 719.103(25).

A change to this statute provides that a unit in a co-op is an interest in real property. 

The effect of this change is that such units can now qualify as homestead property for all purposes under Article X, s.4 of the Florida Constitution. This resolves disparate results among courts and different provisions of Article X, s. 4 as to whether a co-op unit can qualify as homestead property.

Maltese Pension Plan in the Sights of the IRS

The Maltese pension plan is a planning device for U.S. taxpayers to use the U.S. - Malta tax treaty to obtain tax deferral and tax avoidance benefits similar to a Roth IRA, but without many of the limitations of a Roth IRA. For more about it, search "Maltese pension plan" and you will find many sites touting its benefits.

For any of those involved with such plans or contemplating entering into one, they should take note that the IRS has added the arrangement to its 2021 "Dirty Dozen" scams list - at least as to transfers of appreciated property to the plan. Such planning generally treats the contribution of such appreciated property to the plan as a transfer to a "grantor trust," thus avoiding gain generation. However, gain from such disposition is purportedly then not taxed immediately to the participant.

This is what the IRS has to say:

"Some U.S. citizens and residents are relying on an interpretation of the U.S.-Malta Income Tax Treaty (Treaty) to take the position that they may contribute appreciated property tax free to certain Maltese pension plans and that there are also no tax consequences when the plan sells the assets and distributes proceeds to the U.S. taxpayer. Ordinarily gain would be recognized upon disposition of the plan's assets and distributions of the proceeds. The IRS is evaluating the issue to determine the validity of these arrangements and whether Treaty benefits should be available in such instances and may challenge the associated tax treatment."

This is not an outright determination that such arrangements are abusive, but are a warning that the IRS will be looking more closely at that them and has serious concerns about the claimed tax benefits.

IR-2021-144, July 1, 2021

Q&A on Florida's New Directed Trust Act

 Below is a copy of article to be published this evening on Leimberg Information Services:

Florida’s version of the Uniform Directed Trust Act (the “FUDTA”) has passed both houses of the Florida legislature and is expected to be signed into law by Governor DeSantis. Charles (Chuck) Rubin chaired the Florida Bar subcommittee that reviewed and adapted the Uniform Directed Trust Act, and Jenna Rubin also served on the subcommittee. They provide a review of the key provisions that practitioners should be aware of.

QUESTIONS AND ANSWERS

Who does the FUDTA principally affect? Trust directors (persons with authority under a trust instrument to give directions to be followed) and directed trustees (the trustees who are supposed to follow the directions).

Can I avoid the application of the FUDTA by not calling the person with the power to direct a protector or trust director? No. The label given is irrelevant. If a person has the power to direct, then they are a trust director.

Can a trustee be a trust director? No, only persons who have a power to direct but are not trustees are trust directors.

So, any non-trustee with a power to direct is a trust director? Mostly, but there are a few powers one can hold that alone will not make you a trust director, such as the power to remove or appoint a trustee, a power of appointment, and a power of a settlor over a revocable trust.

Why should I care whether a power holder is a trust director? Well, there are a lot of rules and benefits that apply under the FUDTA, but probably the biggest implication is that the trust director is subject to fiduciary duty in the exercise of the power of direction in the same manner as a trustee. Note that some states do not impose fiduciary duties on persons with roles similar to a trust director, or allow the trust instrument to remove such duties entirely.

Wow, that’s pretty harsh for a player with a small role. How are settlors supposed to get someone to take on the role if they have such a duty and the liability that comes along with it? Helpfully, like most provisions in the Trust Code, the trust provisions can be drafted to reduce (or increase) the level of duty.

So I can relieve the trust director of all duty and liability? No, the FUDTA will not let you go that far. Just like a trust instrument cannot entirely relieve a trustee of fiduciary duty (the duty to act in good faith and in accordance with the terms of the trust must always remain), a trust director is also subject to the good faith minimum duty no matter what the trust instrument says.

A trust director can only exercise the powers granted to it in the trust instrument, correct? Mostly, but in addition to the express powers, the trust director also has further powers appropriate to the the exercise or nonexercise of the expressly granted power of direction. Draftpersons can breathe easier knowing they do not have to think of and include every explicit power that a trust director may need in order to exercise the desired power of direction.

How can a trust director protect itself from liability? Not serve! But short of that, the Trust Code provisions that shorten the applicable limitations period for breach of trust to six months via the delivery of a trust disclosure document applies equally to trustees and trust directors.

Does the directed trustee have to follow the directions of the trust director, even if the directed trustee disagrees with the appropriateness of the directions? Yes. The only exceptions are if the trust director is acting outside the scope of the power of direction, or if following the directions would result in willful misconduct by the directed trustee.

What if the direction is a breach of trust by the trust director – does that make it outside the scope of the power of direction and thus the directed trustee does not have to follow it? No, that is not the case. The policy is that if the trust director commits a breach of trust in making the direction, that trust director is liable. This encourages the directed trustee to act in accordance with directions, and since the beneficiaries can sue the trust director they have a remedy and do not have to also be able to sue the trustee.

How can the directed trustee protect itself as to questionable instructions? The trustee can go to court and seek instructions as to its obligations to follow the directions, and can charge the trust for fees and costs incurred in doing so.

Can a trust director demand relevant information from the directed trustee? Yes as to information needed to do its job, and the directed trustee can similarly demand needed information from the trust director.

Does the trust director have to keep an eye on the trustee or give advice or notifications to beneficiaries or other interested persons? No, in the absence of trust provisions requiring it. And the same applies to the directed trustee in regard to monitoring the trust director.

A trust director situation seems similar to a trust that gives power to one trustee to direct a co-trustee. Are the duties and obligations of the affected fiduciaries similar under the Florida Trust Code? Yes, the FUDTA coordinates the duties and liabilities in those two situations so that they are pretty much the same.

Are the rules for suing a trust director for breach of trust similar to suing a trustee? Yes. Such actions are subject to the same statute of limitations and defenses.

A trustee and a trust director both exercise powers over a trust. Do all the Florida Trust Code provisions applicable to trustees apply to trust directors? No, they do not. However, there is an extensive list of Florida Trust Code provisions included in the FUDTA that were determined to be appropriate to apply to trust directors, and those listed provisions do apply.

Does the FUDTA apply only to trusts created after the July 1, 2021 effective date? No, it applies also to trusts created before then, but only as to decisions or actions occurring after that date.

How closely does the FUDTA track the Uniform Directed Trust Act (the “UDTA”)? The FUDTA closely follows the UDTA so decisions from UDTA states will likely be useful in interpreting the FUDTA (and vice-vers_, but care should be exercised since the FUDTA does have some modifications and additions.