Florida Homestead Law
About Face by Third District Court of Appeals Advances Creditors Claims to Constitutionally-Protected Homestead Property: General Direction to Pay Estate Taxes Trumps Constitutional Homestead Protections.
In a surprising reversal, the Third District Court of Appeals on Tuesday, September 3, 2008, reheard and reversed its own opinion issued almost 19 months ago in Cutler v. Cutler, In Re: The Estate of Edith Alice Cutler, 2008 WL 4057751, 33 Fla.L.Weekly D2103a (3rd DCA, No. 3D07-3070, Sept. 3, 2008).
The opinion is significant for probate administration and litigation attorneys, and estate planning professionals for at least two reasons: (1) The Third District Court of Appeals joins the Fifth District in expanding the types of interest in land that may qualify for homestead protection; (2) a general direction in the administrative language at the end of a Will may now trump constitutional homestead protections.
Cutler involved a Decedent, Edith Cutler, who created a land trust naming herself and her two children, Edward and Cynthia as co-trustees. Edith, by deed, conveyed her residence and an adjacent vacant lot to the trust, subject to a life estate in herself. Edith was the sole beneficiary of the trust and she retained the right to withdraw and appoint the principal of the trust to or for her benefit at any time. The trust provided that the remainder interests in these properties, which were titled to the trust, would be distributed to Edith’s estate upon her death.
Edith also executed a will, in which she specifically devised the residence titled to the trust to Cynthia and the adjacent vacant lot to Edward. She also directed that her debts be satisfied equally from both properties should the funds in her estate be insufficient to satisfy those debts.
After Edith’s death, Edward sought to have the two parcels devised to Edith’s estate for equal abatement to satisfy all of Edith’s creditors since the estate funds were insufficient to pay Edith’s debts. The trial court concluded that the residence retained its homestead status while titled in the trust and passed outside of the estate and vested in Cynthia upon Edith’s death retaining its exemption from Edith’s creditors after her death.
Edward appealed and the Third Circuit originally decided, on February 28, 2007, (“Cutler I“) that because Edith both had a life estate in the residence property and occupied it continuously before her death pursuant to the right provided to her in the irrevocable land trust, she was an “owner” of her residence for purposes of devising the homestead protection on that residence on her death. Further, the Court joined other Districts in expanding the types of interest in property to which the homestead exemption applies. Specifically, Edward argued that because the property was titled in an irrevocable trust at Edith’s death, it was not owned by a “natural person” and therefore, the constitutional protections did not apply. The Third District held:
“This court and other district courts of appeal consistently have found that properties held in trust can be impressed, legally speaking, with the character of homestead. Callava v. Feinberg, 864 So. 2d 429, 431 (Fla. 3d DCA 2003)(“[t]he constitutional provision does not designate how title to the property is to be held and it does not limit the estate that must be owned”) (internal citations omitted) rev. denied, 879 So. 2d 621 (Fla. 2004); HCA Gulf Coast Hosp. v. Estate of Downing, 594 So. 2d 774, 776 (Fla. 1st DCA 1992) (devise of house to spendthrift trust irrelevant for purposes of homestead under Article X, section 4 of the Florida Constitution (2003)). Although these cases involve revocable trusts, we find no reason to limit the holdings of these cases to revocable trusts. Accordingly, we find it immaterial that legal title to the residence in this case was held in an irrevocable trust during Edith’s lifetime. The conveyance to Cynthia fulfills all of the legal requirements entitling her to claim that it is “protected homestead” in her.”
The Cutler I Court also held that “strict legal propositions” and “settled law” in Florida required it to deny Edward’s argument to attach the homestead property for purposes of payment of estate debts. The Cutler I Court, relying upon long standing precedent, reasoned that since the homestead property vested in Cynthia “in the twinkle of an eye” immediately upon Edith’s death, it passed outside of the estate. Since the homestead property was never part of Edith’s estate and was never a probate asset, the property, nor the proceeds from the sale of the property, were subject to creditor’s claims due to the Florida Constitutional Homestead Protections.
Fast forward nineteen months to Wednesday, September 3, 2008. The Third Circuit turns about face 180 degrees and reverses itself. While the Court affirmed the part of its order confirming the property at issue retained its homestead character, even though it was titled in an irrevocable trust at the time of death, it reversed the part of its February 28, 2007 Order finding the property exempt from the payment of decedent’s debt!
Relying upon legal principals of testamentary construction, the Court looked to the plain language of the administrative provisions of Edith’s Will, and found that she directed that her debts be satisfied equally from both properties should the funds in her estate be insufficient to satisfy those debts. Essentially, the Court treated Edith’s decision to use boilerplate language in the administrative payment portion at the end of her Will as the equivalent of her choosing to devise her homestead property while she was alive in a manner that terminates the protections accorded by the Florida Constitution (i.e., if Edith had sold her property during her life and distributed the proceeds to Cynthia, those proceeds would unquestionably lose their homestead character.) While the Court recognized that “the benefits of homestead protections vest in a qualified beneficiary at the moment of a testator’s death, the property in this case passed into the beneficiary’s hands impressed with the obligation to pay the testatrix’s debts, and obligation that deprived the property of homestead protection under article X, section 4.” Cutler II at p.10.
This fascinating and alarming decision should send a message to all probate practitioners to be wary of using boilerplate language in estate planning documents. The language in Cutler, which the Court relied on to strip Edith’s residence of its homestead protection, was that seen in everyday practices:
[Article XII: I direct that] [a]ll claims, charges and allowances against, and costs of administration of my Estate…shall be paid out of the residuary portion of my Estate to the extent that gift suffices. The balance of such items shall be paid out of and shall reduce equally the gifts under Article VI (the gift to my home to Cynthia…) and Article VII (the gift of the vacant real property next to my home to Edward…) herein.
Justice Shepherd issued a blistering dissent pointing out the break with long standing precedent, and the clear language of the Constitution, that the exemption from forced sale of Edith’s property to satisfy her debuts that inured to Edith’s benefit during her lifetime “inure to [the] heirs of the owner” upon her death.
The lesson to be learned from this case, in my view, is to not put too much stock in stare decicis et quieta non movere in matters that implicate creditors’ rights in Florida, and to be extra careful when drafting general directions to pay estate taxes. My feeling from reading the opinion is that had Edith simply chosen language that allowed her estate to pay her debts, without specifying that debts were to be paid equally from each property, the decision would have remained in the form in which it originally appeared in February, 2007.