Protect Your Legacy With The Florida Irrevocable Homestead Trust

One of the most common and effective ways for parents to help their children is to provide them with their own home. While this can be done in several ways—from conveying an existing home, to purchasing a home for their children to take title—all methods have the same problem: the home will not qualify as a homestead tax and asset protection purposes, nor will it receive the benefits available under the Internal Revenue Code (I.R.C.) if the parents reside in another home that they claim as their primary residence.

Similarly, if parents try to circumvent these issues by transferring cash to the child to purchase and own the home, this will constitute a taxable gift by the parents under I.R.C. §2501, increase the amount that is subject to estate taxes on the death of the child under I.R.C. §2001, and, if the child is married or later marries, make the home subject to equitable distribution as a marital asset in a divorce.

All these problems can be avoided with a Florida Irrevocable Homestead Trust. With the right language and provisions, transferring the home or cash to this type of trust can prove a boon to your children for years to come. Learn how this works and how the attorneys and Jurado & Farshchian, P.L. can help.

The Basics of the Florida Irrevocable Homestead Trust

In simple terms, a trust is a legal relationship in which the first party (trustor or settlor), transfers a property to the second party (trustee), for the benefit of the third party (beneficiary). An irrevocable trust is one that cannot be revoked or modified by the trustor or settlor.

Trusts are highly versatile: They can be structured and arranged in many ways and can specify precisely how and when the assets pass to the beneficiaries. In addition to providing control over how your assets are distributed, a trust can protect your estate from your beneficiaries’ creditors and may allow your assets to circumvent probate, thereby saving time and money while reducing court fees.

A homestead is a residence used and occupied by a natural person with the intent to permanently live in the home. It must be no greater than one-half acre of contiguous land if in a municipality, or no greater than 160 acres of contiguous land if outside a municipality (such as an unincorporated part of the county).

In recent years, Florida courts have relaxed the requirement that a homestead must be owned and used by a natural person. Consequently, an irrevocable trust can own homestead so long as the beneficiary resides in it as their permanent residence, has a present possessory right to the homestead, and the trust is passive. This requires precise language that grants the child-beneficiary the exclusive and continuous present right to full use, occupancy, and possession of the homestead real estate owned by trust for the life of the beneficiary, and the beneficiary uses the home as his or her personal residence. Crucially, the trust should waive any fiduciary duty of the trustee to sell the homestead or diversify trust assets.

In short, the Florida Irrevocable Homestead Trust provides all these benefits—and much more—with respect to a homestead property.

Tax Implications with the Florida Irrevocable Homestead Trust

When transferring a home or cash to a Florida Irrevocable Homestead Trust, the assets will still constitute a taxable gift under I.R.C. §2501. However, certain trust provisions can ensure that the home is treated as owned by your children for the following purposes:

• Ad valorem taxes, which means the property will receive a property value exemption, a 3% cap on ad valorem tax value appreciation, and the portability of up to $500,000.00 of under-assessment, all of which will save significantly on taxes.
• Federal income taxes, which means the property will receive the benefits under the I.R.C., be excluded from the child’s estate for estate tax purposes, and not be treated as owned by the child as a marital asset if the child gets a divorce.

When parents transfer property to an irrevocable trust—and retain the “grantor trust powers” set forth under the Internal Revenue Code—then the trust will be disregarded for federal income tax purposes, and the parents will be treated as owning the property owned by the trust pursuant to I.R.C. § 671.

However, if parents do not retain the grantor trust powers, then certain provisions can instead make the child the owner of the property owned by the trust for federal income tax purposes. This creates what is known as a Beneficiary Deemed Owned Trust (BDOT), a type of Florida Irrevocable Homestead Trust that has confers additional benefits—provided it has the following language:

• Gives the beneficiary the sole right to withdraw income and/or property in the trust in his or her sole discretion;
• Does not articulate any of the grantor trust powers; and
• Has an independent trustee or an adverse party who must approve distributions (if there are discretionary distributions also authorized by the trust)

Under the Internal Revenue Code, a home owned by a BDOT is treated as owned by a beneficiary, which allows it to receive several deduction benefits.

Consider the following example. A home is placed in the BDOT for the child-beneficiary, and it is sold for $2 million to provide income to the child. If the BDOT makes an income tax distribution of $178,500 to the child beneficiary (to partially satisfy the their withdrawal right in the trust), the child beneficiary would include $480,000.00 in their estate if they die the year of the sale—rather than the full $2 million. If the child dies before the sale of the home, then there would be no estate tax inclusion.

Marital Asset Implications

Based on Florida law and several judicial opinions, assets owned by a trust that a divorced spouse is not actively managing are considered nonmarital property that is not subject to equitable distribution in a dissolution of marriage. This extends to homestead property as well.

However, if any marital assets are used to pay down a portion of a mortgage and/or expenses on the nonmarital home owned by the BDOT, the nonmarital home can become a marital asset subject to equitable distribution. Note that if the BDOT was created to own a home for use by the child and their spouse, the child and spouse should execute a prenuptial agreement to ensure that the home and assets owned by the BDOT are nonmarital assets.

Jurado & Farshchian, P.L. Attorneys Know How to Protect Your Legacy

Believe it or not, all this only scratches the surface of how a Florida Irrevocable Homestead Trust can help better protect your legacy for your children. To navigate the various state and federal regulations concerning taxation and estate distributions, your trust must be meticulously worded and structured to cover all your bases. A single provision can make the different between thousands of dollars in savings for your children. That is why our attorney are strenuously up to date on the latest changes in laws and legal practices, to ensure our clients—and their legacies—are maximally protected.

To learn more about our services, do not hesitate to call us today at (305) 921-0440 or send us an email to [email protected] and we will assist you.