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By:
Barry A. Nelson, Esq.
Kevin E. Packman, Esq.

Publication:

This article was published in the January & February 2003 issues of The Florida Bar Journal and can also be viewed at the Florida Bar Web Site. www.flabar.org

Introduction

In recent articles discussing high-profile corporate malfeasance and accounting scandals, the use of Florida’s unlimited homestead exemption to avoid creditors’ claims has been noted with concern. Often referring to it as a legal loophole, detractors of the unlimited homestead exemption point out that the exemption permits debtors to divert substantial assets to the purchase of new and extravagant homes that can be shielded from creditors under Florida’s state constitution. The Washington Post, on July 12, 2002, reported that Scott D. Sullivan, former CFO of WorldCom, is building a $15 million Boca Raton “mansion” that may qualify for homestead exemption status. Yet, concerns about Florida homestead detailed in the national press are nothing new. For example, in 1991, The New York Times reported that Bowie Kuhn, the former Major League Baseball Commissioner, had sold his $1.2 million New Jersey home and within weeks had bought a similar estate in Florida to shield his assets before then filing for bankruptcy. These and many other articles express concern that debtors can avoid creditors by moving to Florida, purchasing a new home and establishing residency.

While some may benefit from such planning, many debtors, as well as reporters writing about them, are unaware of the requirements that must be satisfied to obtain the benefits of Florida’s homestead exemption. This article will discuss the limits of Florida’s existing homestead exemption for asset protection. As such, Part I of this article will focus on the exemption provided by the Florida Constitution in Article X §4 and its legislative implementation by the Florida Statutes chapter 222. It will not discuss Florida’s homestead exemption for purposes of ad valorem taxation, which is found in the Florida Statutes chapter 196.

In Part II, the article will discuss certain federal limitations on the homestead exemption (such as federal tax liens), fraudulent transfer issues and proposed federal bankruptcy legislation that would severely limit homestead protection for non-Florida debtors seeking to establish domicile and move to Florida to avoid creditors. In addition, Part II will discuss planning to take advantage of homestead and conflicts that can arise in that context between professional advisors who may have different views. Some advisors may recommend owning a homestead with little mortgage debt, while others may recommend owning the homestead with a significant mortgage in order to benefit from mortgage interest deductions for federal income tax purposes and from the ability to enhance other investments through funds that are not tied up in home equity. While there may be merit from a financial and tax standpoint to place a large mortgage on a homestead, those concerned with asset protection may find that having no mortgage, or a small mortgage, on their homestead provides peace of mind that is more important than the tax and financial advantages.

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