Sunday, August 28, 2022

Landmark Florida Supreme Court Decision on Homestead Protections Has Been Written Out of the Law by Two Appellate Courts, and No One Appears to Have Noticed

 SUMMARY: In Havoco of America, Ltd. v. Hill, the Florida Supreme Court ruled that the Florida constitutional protections of homestead property against creditor claims trump Florida's fraudulent transfer laws. Thus, homestead protections include nonexempt assets that are added to or invested in a homestead, even if added with the intent to delay, hinder or defraud creditors. However, in a recent appellate opinion, this recognition was effectively ignored and, in practice, vitiates the holding of Havoco. And this is the second time an appellate court has done so in recent years.

FACTS: Article X, section 4(a) of the Florida Constitution exempts from forced sale the homestead of a natural person, except for the payment of taxes and assessments thereon, obligations contracted for the purchase, improvement, or repair thereof, or obligations contracted for house, field or other labor performed on the realty. Aside from these explicit three exceptions to homestead protection, over time, Florida case law has developed some additional exceptions, principally relating to equitable liens for bad acts of the owner. In Havoco, the Florida Supreme Court limited the scope of this equitable lien exception for protection, holding that a transfer of assets into a homestead with the intent to delay, hinder or defraud creditors is not enough, by itself, to give rise to an equitable lien that defeats the homestead protection. It further provided Florida's Uniform Fraudulent Transfer Act (FUFTA) has no effect on the constitutional protection. However, the court did allow that an equitable lien could arise when the funds invested were obtained through theft, fraud, or egregious conduct – something akin to a source of funds exception.

Havoco specifically provided: 

The federal courts which have addressed the applicability of section 726.105 [Florida's Uniform Fraudulent Transfer Act] to homestead claims have concluded that it has no effect on the constitutionally created homestead exemption … We agree.

So unless the funds invested in the homestead were obtained through theft, fraud, or egregious conduct, the homestead remains protected per Havoco. One conceptual way to summarize this is that a fraudulent transfer is not the fraud, theft, or egregious conduct that vitiates constitutional protection. Such fraud must be something beyond the incidents of a fraudulent transfer, such as common law fraud (generally requiring a misrepresentation or intentionally false statement or concealment) or similar egregious action.

In Renda v. Price, a recent Florida appellate decision, a $10 million judgment was obtained against a corporation relating to an automobile accident. Arrangements were made for corporate assets to reach the wife of the corporation's owner, after which the wife sold the assets and invested them in homestead property. The judgment holder sought to reach the homestead assets. The trial court allowed the equitable lien, predicated on the defendant's conduct constituting "badges of fraud" as enumerated by FUFTA, but would not allow the judgment creditor to foreclose on it. Florida's Fourth District Court of Appeals upheld the lien and also allowed foreclosure to proceed. The appellate court noted that under Havoco, an equitable lien on homestead property could attach and be foreclosed when the property was acquired with funds generated by fraudulent or egregious activity. It effectively found that the homestead was purchased with funds obtained by fraud and thus could be reached by the creditor. The appellate court did not indicate what the fraud was, other than indirectly, by reference to the trial court's finding of fraud via the existence of badges of fraud under FUFTA. So, while Havoco specifically provided that a fraudulent transfer is not the fraud that vitiates constitutional protection, the trial and appellate courts found the "fraud" that Havoco allowed to allow an equitable lien was the indicia (badges of fraud) that are used to establish a fraudulent transfer. 

COMMENT: Havoco says the application of FUFTA, even with the intent to defraud, does not override the constitutional protection – the subject assets must have been obtained by fraud or other egregious behavior. That is, the subject assets must be obtained by fraud or egregious behavior beyond the behavior that gives rise to a fraudulent transfer under FUFTA. If the only bad behavior is the behavior described in FUFTA (which appears to be the case in Renda), then the holding in Havoco is written out of the law when the only "fraudulent behavior" are badges of fraud indicia under FUFTA. That is, the Renda courts are saying that the "fraud" exception to Havoco is met by a mere finding of a fraudulent transfer under FUFTA by reason of badges of fraud thereunder that are used to prove requisite intent. With that logic, the Florida Supreme Court's holding that a mere fraudulent transfer under FUFTA is not enough to void the constitutional protection is vitiated since only elements of FUFTA are being used to demonstrate fraud outside of FUFTA. While Havoco also allows an equitable lien when the subject proceeds are obtained by egregious behavior, the defendant's conduct, whether called egregious or not, is not bad behavior beyond the badges of fraud provided in the fraudulent transfer statute, so the egregious label should not weaken the continued constitutional protection. There is no suggestion in the opinion that the subject assets were obtained via "theft."

This is not the only appellate court to make a similar argument. In 2014, in the bankruptcy case of In re Bifani, a debtor in bankruptcy fraudulently transferred property to his cohabitating girlfriend. The girlfriend sold the property and invested $669,233 of the proceeds to purchase a home in Sarasota, Florida. The debtor and the girlfriend then resided together at the home, which qualified as homestead property of the debtor's girlfriend. The bankruptcy trustee went after the girlfriend and persuaded the Bankruptcy Court to impose an equitable lien on the homestead. The Bankruptcy Court imposed the lien and did this based on general equitable principles, noting "the court may impose an equitable lien if the general considerations of right and justice dictate that one party has a special right to a particular property and there is an absence of an available lien or no adequate remedy at law." Interestingly, there is no reference to or consideration of the above-quoted language of Havoco declaring that the specific intent to defraud creditors does not void the homestead protection from creditors.

The Bankruptcy Court opinion was appealed to the U.S. District Court for the Middle District of Florida. Here, that court picks up on the limitations that Havoco imposed and reverses the Bankruptcy Court. The analysis is instructive: 

Florida's appellate courts have interpreted Havoco to limit equitable liens on homesteads to cases "in which the homesteads were purchased with the fruits of fraudulent activity." Willis v. Red Reef, Inc., 921 So. 2d 681, 684 (Fla. 4th DCA 2006). Those cases do not include situations where the homestead owner converted otherwise reachable funds into an exempt homestead, even if this is done through a fraudulent transfer made with the intent to hinder, delay, or defraud creditors. Id.; See Dowling, 2007 WL 1839555, at *4 ("[T]he homestead exemption does not contain an express exception for real property that is acquired in Florida for the sole purpose of defeating the claims of out-of-state creditors."); Conseco Servs., LLC v. Cuneo, 904 So. 2d 438, 440 (Fla. 3d DCA 2005) ("It is not enough that the Cuneos transferred their nonexempt funds to an exempt asset to keep those funds from creditors. If a debtor acquires homestead property with the 'specific intent to hinder, delay, or defraud creditor,' the property still enjoys Florida's constitutional homestead protection.”). Havoco and its progeny instruct that the fraudulent transfer of assets into a homestead does not provide a basis for the imposition of an equitable lien. The Bankruptcy Court, therefore, abused its discretion by imposing an equitable lien on LaMarca's homestead, as the lien infringes on the homestead exemption granted in article X, section 4 of the Florida Constitution.

All is well that ends well? Not quite. On appeal, the 11th Circuit Court of Appeals reversed the U.S. District Court and allowed the equitable lien to attach to the girlfriend's homestead property. The court noted that while Havoco allows homestead creditor protection to continue for funds put into a homestead, that is not the case where funds obtained through fraud or egregious conduct were used to invest in, purchase, or improve the homestead. The court went on to find "fraud" that allowed the equitable lien due to various badges of fraud under the fraudulent conveyance statute – exactly what also occurred in Renda in the first case discussed above – and with the same effective overwrite of the holding of Havoco.

It is the author's opinion that these appellate courts have confused the typical legal definition of "fraud" with "fraudulent transfer" and concluded that a fraudulent transfer constitutes fraud. They would not be the first courts to conclude that a "fraudulent transfer" constitutes fraud under law. Indeed, more modern fraudulent transfer statutes such as the Uniform Voidable Transfer Act intentionally eschew the terms "fraud" and "fraudulent" to avoid unintended characterizations. An article on the subject provides:

The driving force behind the change is the concept of "constructive fraud," which permits the avoidance of transfers made or of obligations incurred by an insolvent debtor in exchange for less than reasonably equivalent value. Although denominated as "fraud," a constructively fraudulent transfer involves neither fraud nor improper intent, creating confusion among some courts that have issued rulings improperly limiting the scope of the avoidance remedy. To address these concerns, the word "fraud" has been supplanted by the term "voidable" in nearly every portion of the UVTA and the Commission's official comments. Moreover, the UVTA adopts the more aggressive view that even "actually fraudulent" transfers do not require fraud. In lieu of the traditional standard applied to transfers made with the intent to "hinder, delay or defraud" creditors, the comments to the UVTA shift the inquiry to "hinder or delay" and substitute the idea of "unacceptably contraven[ing] norms of creditors' rights" as the measure for when efforts to hinder or delay render a transaction voidable. Uniform Voidable Transactions Act Approved by Uniform Law Commission to Replace UFTA, Jones Day Publications, September/October 2014.

Presently, a motion for rehearing, for rehearing en banc, and/or certification of the issue to the Florida Supreme Court is pending in Renda. One can only hope that the issue is revisited, and the improper overwriting of the holding in Havoco is recognized and reversed. Or barring that, that an appeal is taken to and accepted by the Florida Supreme Court to protect its holding in Havoco.

CITES: Fla. Const. Article X, section 4(a); Florida Statutes Chapter 726; Havoco of America, Ltd. v. Hill, 790 So.2d 1018 (Fla. 2001), Renda v. Price, No. 4D21-534, 2022 WL 2962564 (Fla. Dist. Ct. App. July 27, 2022); In re Bifani, 493 B.R. 866 (Bankr. M.D. Fla. 2013); Uniform Voidable Transactions Act Approved by Uniform Law Commission to Replace UFTA, Jones Day Publications, September/October 2014.


Thursday, August 5, 2021

New Florida Homestead Provisions

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.


Sunday, August 30, 2020

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)

Thursday, May 28, 2020

Single Family Home Still Homestead Property Even Though Bedrooms Are Rented Out

In a recent opinion of the 2nd DCA, the appeals court reversed the trial court and held that an entire single family residence qualified as homestead for creditor protection purposes, even though three of the four bedrooms were rented out.

The court applied a two-part test to determine if the commercial use portion can be severed from the non-commercial use portion, such that the property could be divided into homestead and non-homestead property. The court's analysis was as follows:

In First Leasing, this court suggested a two-part analytical framework in determining if the homestead exemption extends to the entire property: first, the court must determine whether the debtor's residence is a fraction of the entire property; and second, the court must determine whether the property can be severed -- that is, by using an imaginary line the residence can be severed from the remainder of the property. 591 So. 2d at 1153. Applying this test to the single-family residence at issue here, the answer to each question is no. Mr. Anderson's father resided in the home and, like the tenants, shared the common areas of the house. Further, the rented bedrooms in the home cannot be severed from the residence by an imaginary line without destroying its utility as a single-family residence.

Tuesday, June 18, 2019

Limits on Effects of Order Determining Homestead on Title

A recent appellate decision addresses the effect of an order determining homestead vis-à-vis title to the homestead. In the case, a decedent left her homestead by will to her three children. The will also provided a life estate in the property to two of the children. The probate court entered an order determining homestead, which determined that the homestead property was divided in equal shares to the children, but did not mention the life estate provided for in the will. The trial court determined the order determining homestead divested the life tenants from their life estate per the absence of any mention of the life estate (thus allowing partition of the property to proceed on petition of two of the children). Florida’s 5th DCA reversed the trial court, and held that the order determining homestead did not terminate the life estate provided for in the decedent’s will.[1] The appellate court noted that the homestead order did not create new rights, but only explained or clarified the rights that already existed by operation of law.

The appellate court rejected arguments that the children’s consents to the homestead order altered the parties’ individual interests in the estate. It also ruled that the order was not a title transaction within the meaning of Fla.Stats. §712.01(3) noting:

the Homestead Order in this case does not constitute a title transaction, as defined by section 712.01(3), Florida Statutes (2011), extinguishing the life estates in the property. ‘A title transaction within the meaning of this act is defined in section 712.01(3), Florida Statutes, and means any recorded instrument or court proceeding which affects title to any estate or interest in land and which describes the land affected with legal sufficiency.’ Cunningham v. Haley, 501 So. 2d 649, 652 (Fla. 5th DCA 1986). Although the probate and recording of a will constitutes a title transaction within the meaning of section 712.01(3), see Mayo v. Owens, 367 So. 2d 1054, 1057 (Fla. 1st DCA 1979); Kittrell v. Clark, 363 So. 2d 373 (Fla. 1st DCA 1978), Kenneth and Carla point to no authority holding or suggesting that an order determining homestead property constitutes the same.

Mullins v. Mullins, No. 5D18-1672, 2019 WL 2396753, at *4 (Fla. Dist. Ct. App. June 7, 2019)noting

Thursday, May 23, 2019

Documentary Stamp Tax Newlywed Exception Now Applies to All Married Persons [Florida]

Generally, transfers of real property in Florida are subject to documentary stamp taxes based on the consideration paid. If the real property is subject to a mortgage when transferred, the unpaid balance of the mortgage is counted as consideration for this purpose.

There is no general exception to this rule for transfers between spouses. However, Fla.Stats. §201.02(7)(b) does provide that no documentary stamp taxes will apply to a transfer of homestead property between spouses (a) if the only consideration is the mortgage debt, and (b) the deed or other instrument of transfer is recorded within 1 year of the marriage. Many questioned why this exception was limited to newlyweds.

Effective July 1, 2019, requirement (b) above no longer will apply, per Florida House Bill No. 7123 which has been enacted into law. Thus, spouses can transfer homestead property between themselves, even if encumbered by a mortgage, without documentary stamp taxes – so long as there is no other consideration for the transfer other than the mortgage.

Sunday, December 2, 2018

A Chart to Help You in Planning Homestead Dispositions

I’ve been giving some recent seminars on Florida homestead law. One of the topics I discussed are the limitations on devise of homestead, and some of the obvious and/or hidden planning problems that result when the limitations apply (and how to deal with them when they do arise).

I thought a table that can be used as a quick reference of these problems would be useful. I think this is especially so for attorneys during client discussions or drafting to make sure there is not a hidden problem that was not or is not being considered in planning.

I’ll be inserting this as a new practice aid in Rubin on Florida Homestead. As many of you know, the treatise has an extended discussion of the principal planning that can be done to avoid most of these problems.

I developed some other charts and checklists in these seminars, which I will be rolling out here and in the treatise in the coming weeks.

You can download a PDF of the new table from Dropbox here. Since this is newly developed, if anyone sees any errors or omissions or has other comments, please send me an email at crubin@floridatax.com.