Florida Irrevocable Grantor Homestead Trust: Having Your Cake and Eating it Too — Second Course
The first course of this article discussed lifetime conveyances of homestead and analyzed how the Florida irrevocable grantor homestead trust (FIGHT) is intended to avoid the devise restriction[1] while simultaneously maintaining homestead tax benefits and creditor protection. The second course of this article serves up additional considerations when contemplating using the FIGHT and then conclude with some general comments and recommendations regarding the drafting of a FIGHT. Below are additional considerations.
Federal Tax
The FIGHT is not intended to be an estate tax planning vehicle, but it is still necessary to understand the estate, gift, and income tax implications of the FIGHT. When using a FIGHT, the transferor, typically, either executes a deed giving the transferor a life estate in the homestead and the FIGHT a remainder interest, or includes language in the trust instrument giving the transferor the right to use and possess the homestead. In either case, the trust instrument will usually include provisions that will convey all of the interest in the homestead back to the transferor at a future point in time.[2] Due to the retained right of use of the homestead[3] and the reversionary interest,[4] the homestead will be included in the transferor’s gross estate. Since estate tax inclusion will occur, the homestead will be subject to a fair market value basis adjustment upon the transferor’s death (commonly referred to as the “step-up in basis”).[5] Generally, the FIGHT is not being used to remove assets from the transferor’s estate, but to avoid the devise restriction, so the inclusion and resulting basis adjustment is usually welcomed.
A completed gift, despite its future inclusion in the transferor’s gross estate, is subject to gift tax.[6] If a completed gift occurs, the transferor will need to report the gift on a timely filed gift tax return, and proper reporting of the gift will require a qualified appraisal of the homestead. Furthermore, if the trust is for the benefit of the transferor’s family, the entire value of the homestead may be subject to gift tax.[7] Therefore, the FIGHT should be drafted with specific provisions to avoid triggering the gift tax and its reporting obligations. This may be accomplished by including a lifetime[8] limited power of appointment (LPOA) and/or a power to exclude trust beneficiaries, which will render the transfer an incomplete gift and not subject to gift tax (or gift tax reporting).[9]
While the FIGHT, if used solely for homestead property, is unlikely to generate much ordinary income, its terms will determine the income tax treatment of future transactions involving the homestead. If the FIGHT is drafted as a non-grantor trust, then the trust would file, report, and pay income taxes separately from the transferor. However, the FIGHT should be drafted as a grantor trust so the transferor will be treated as the owner of the trust assets for federal income tax purposes[10] and, therefore, allowed to continue to take permissible deductions pursuant to I.R.C. §164 (such as property taxes and mortgage interest) and to exclude gain from the sale of the principal residence pursuant to I.R.C. §121 (if the FIGHT sells the homestead).[11] A detailed discussion of grantor trust powers is beyond the scope of this article. However, perhaps the simplest way to ensure grantor trust treatment is to include a person or entity who is not also an income beneficiary of the trust (such as a charity) as a permissible appointee of a LPOA.[12]
Acceleration/Due-on-Sale Clause
A due-on-sale clause, also known as an acceleration clause, is a typical provision found in a mortgage that allows the lender to call the note due in its entirety when there is a change of ownership of the mortgaged property. A federal act passed in 1982, the Garn-St Germain Depository Institutions Act,[13] provides a federal preemption which prohibits lenders from activating the due-on-sale clause in a mortgage under certain conditions.[14] Specifically, Garn-St Germain provides that “a lender may not exercise its option pursuant to a due-on-sale clause upon…a transfer into an inter vivos trust in which the borrower is and remains a beneficiary and which does not relate to a transfer of rights of occupancy in the property.”[15] The aforementioned exception notably does not require that a trust be revocable for the exception to apply. Instead, it only requires that the transferor be a beneficiary of the trust and that the trust gives the transferor the right of occupancy in the mortgaged property (the trust exception). The FIGHT is an inter vivos trust, and the transferor will retain the right to the use and occupancy of the property. However, to fall squarely into the trust exception, the transferor must also be a beneficiary of the FIGHT. Fortunately, the Florida Statutes define beneficiary of a trust to include “a person who has a present or future beneficial interest in a trust, vested or contingent.”[16] Therefore, even if the transferor retains a life estate in the homestead, the transferor’s reversionary interest in the homestead in the trust is a future beneficial interest, which means that Garn-St Germain should apply to prevent mortgage acceleration upon the initial conveyance of the homestead to the FIGHT.
If the transferor dies before the reversionary interest is triggered, the homestead will pass pursuant to the terms of the FIGHT. If the homestead passes outright to a spouse or minor child, then the lender should still be prohibited under Garn-St Germain from calling the note due.[17] If the homestead is to remain in trust for the benefit of the transferor’s family, it is less certain as to whether Garn-St Germain will prohibit note acceleration. It may fall under the exception for “a transfer to a relative resulting from the death of a borrower” (the relative exception).[18] Clearly, there would be a transfer resulting from the death of the transferor. The question is whether trust ownership and not direct ownership by a relative would be sufficient to fall within the relative exception. If the FIGHT contained language granting a trust beneficiary the right to the use and possession of the property, such provision would support the argument that the transfer is to a relative since, under Florida law, such an interest is deemed to be equitable title to real estate by the beneficiary.[19] Additionally, inclusion of this type of provision should also permit the beneficiary to claim the property as homestead and enjoy the homestead tax benefits.[20]
Future Transactions with Homestead
Transactions involving homestead after the conveyance to the FIGHT will be more complicated than outright ownership of the property. The trustee of the FIGHT will either possess a remainder interest or a fee simple interest in the homestead. Therefore, the trustee of the FIGHT will need to agree to and participate in any transaction that involves selling or refinancing the homestead, or using it as collateral, as well as purchases of new property or investing homestead sale proceeds. With regard to a homestead sale, the transferor should be mindful that due to the homestead being owned partially or wholly by the FIGHT, the sale proceeds will be divided based upon legal ownership of the homestead. The division of the sale proceeds is of particular importance since a FIGHT is a grantor trust, which means, to the extent there are gains, all income tax will be paid by the transferor even though he or she may receive only a portion, if any, of the homestead sale proceeds.
Property Tax Reassessment
F.S. §193.155(3)(a) requires that homestead be assessed “at just value as of January 1 of the year following a change of ownership” and defines “change of ownership” as “any sale, foreclosure, or transfer of legal title or beneficial title in equity to any person.” However, if after the change or conveyance the transferor remains entitled to the homestead exemption and no person other than the transferor applies for homestead, then the definition of change of ownership excludes both a “transfer between legal and equitable title or equitable and equitable title”[21] and a “transfer…by means of an instrument in which the owner is listed as both grantor and grantee of the real property and one or more other individuals are additionally named as grantee.”[22] Therefore, the conveyance of homestead to a FIGHT should not trigger a reassessment of the homestead so long as the transferor retains a life estate in the homestead or the terms of the trust give the transferor the right to the use and possession of the homestead.[23] It may be safest for the transferor to retain a life estate in the deed conveying title to the trustee of the FIGHT.
However, will the homestead be reassessed upon the death of the transferor? F.S. §193.155 requires reassessment in the “year in which the property receives the [homestead tax] exemption” or there is a “change of ownership.”[24] Fla. Const. art. VII, §6, provides that “another legally or naturally dependent upon the owner” who has “equitable title” and maintains the homestead as a “permanent residence, is entitled to the homestead tax exemption. Fla. Const. art. VII, §4(d), provides that “[a]ll persons entitled to a homestead exemption under Section 6” shall be entitled to the Save Our Homes assessment limitation and such assessed value “shall change only as provided in this subsection.” Subsection (d) limits the increase in value for tax assessment purposes to no greater than 3% per year unless “[n]ew homestead property” is established. A surviving spouse or dependent child (collectively “surviving beneficiary”) qualifies as naturally and legally dependent upon the transferor. Therefore, if the surviving beneficiary resided or continues to reside on the homestead, then the surviving beneficiary qualifies under §6 and consequently under §4. As a result, no “new homestead” is established, as the surviving beneficiary merely continues the prior established homestead status of the transferor. Although no legal change of ownership may occur after the transferor’s death, a beneficial change of ownership does transpire, potentially triggering reassessment unless certain exceptions apply. F.S. §193.155(3)(a)(2) and (4) exclude from the definition of “change of ownership” a “change or transfer to a surviving spouse” and “a transfer [] between the owner and another who is a permanent resident and who is legally or naturally dependent upon the owner.”[25] Thus, if the surviving beneficiary resided or continues to reside on the homestead, no change of ownership occurs under the aforementioned exceptions. Consequently, following the transferor’s death, reassessment of the homestead should not occur if a surviving beneficiary continues to reside on the property and, under the terms of the FIGHT, holds a beneficial interest for life.[26]
Florida Documentary Stamp Tax
F. S. §201.02 applies a transfer tax of 70¢ per $100 of consideration on any transfers related to real property (the doc stamp tax). The purpose of the doc stamp tax is to impose a tax on a “transfer for consideration of a beneficial interest in real property.”[27] Further, such purpose should be construed liberally when determining whether the doc stamp tax is applicable to a transfer.[28] Three elements appear to be necessary to trigger the doc stamp tax: 1) transfer, 2) consideration, and 3) change of beneficial interest. The term “transfer” for doc stamp tax purposes encompasses any interest in real property “assigned, transferred, or otherwise conveyed.”[29] Construing this term liberally, an executed deed constitutes a transfer for doc stamp tax purposes. The term “consideration” for doc stamp tax purposes includes any money paid, indebtedness discharged, and property exchanged other than money, as well as mortgage indebtedness or other encumbrances attached to the real property interest being transferred.[30] If homestead is unencumbered and transferred to a FIGHT without any additional consideration, then the doc stamp tax will not be triggered since the “consideration” element is missing.[31] However, if the homestead being transferred to a FIGHT is encumbered (for example, by a mortgage),[32] the analysis as to whether the doc stamp tax applies depends on whether there was a transfer of beneficial interest in the homestead.[33]
F.S. Ch. 201 does not define what constitutes a transfer of a beneficial interest for doc stamp tax purposes. Chapter 12B-4 of the Florida Administrative Code, interpreting the doc stamp tax, also fails to specifically define a beneficial interest transfer but does provide instruction on the issue. F.A.C.R. 12B-4.013(28) provides that “[a] deed to or from a trustee conveying real property is taxable to the extent that the deed transfers the beneficial ownership of the real property and to the extent that there is consideration for the transfer.”[34] If there is no change in beneficial ownership, then no doc stamp tax is due. The administrative code subparagraph titled, “No change in Beneficial Ownership,” provides the following illustration:
“[I]f [transferor] owns encumbered or unencumbered real property and conveys it to the trustee of a trust of which [transferor] is the sole beneficiary, the conveyance is exempt from the stamp tax.”[35]
The subparagraph goes on to state that if the transferor is not the sole beneficiary of the trust, doc stamp tax is due “to the extent of the consideration, if any, for the beneficial interest in the real property transferred to such other persons.”[36] Based on the expressed purpose of the doc stamp tax and the administrative code guidance, whether the doc stamp tax would apply to a transfer of encumbered homestead to a FIGHT hinges on whether any beneficial interest in real property has been transferred to someone other than the transferor.
Fortunately, the Florida Department of Revenue (DOR) has provided guidance as to the types of transfers that do not constitute a transfer of beneficial interest by the transferor for doc stamp tax purposes. In TAA 09B4-003 (Apr. 14, 2009), a married couple requested a DOR opinion as to whether the transfer of condominium units to their joint trust would be subject to the doc stamp tax. The husband owned six encumbered units, solely in his name, and the couple also jointly owned a separate encumbered unit. The DOR determined that there was “no change in beneficial interest” in the joint unit upon the conveyance to the joint trust.[37] The DOR further stated, “Husband and Wife [were] currently in title to the property, and a deed to a revocable trust where Husband and Wife [were] the only beneficiaries during their lifetimes would not represent a conveyance to another person or entity.”[38] With regard to the other six units owned solely by the husband, the DOR found that only a 50% interest was being transferred resulting in a doc stamp tax calculation based upon 50% of the mortgage balance on the transferred units. Therefore, despite the husband transferring the entire fee simple interest to the joint trust, he was deemed to have retained a 50% beneficial interest not subject to the doc stamp tax. In TAA 2004(b4)-011 (Dec. 2, 2004), a married couple sought an opinion as to whether a transfer of their homestead to their QPRTs was subject to the doc stamp tax. The DOR concluded the couple retained beneficial ownership, and “[s]ince the grantors retained beneficial ownership of the real property and there [was] no consideration for the transfers, [the transfers to the QPRTs were] exempt from documentary stamp tax.”[39] In TAA 20B4-003 (Oct. 16, 2020), a transferor requested an opinion as to whether a lady bird deed (LBD) was subject to the doc stamp tax. The DOR concluded that the LBD “does not transfer any present beneficial interests in real property.” Stating further that the life tenants “retain all rights to the subject properties” and the remainderman’s interest “is contingent upon the death of the Life Tenants,”[40] the DOR explained that “[s]ince there is no present transfer of beneficial interests in the subject properties, [the LBD] is not subject to documentary stamp tax regardless of any consideration.”[41]
The TAAs discussed above clearly illustrate that a transferor may execute a deed conveying property and not be subject to the doc stamp tax to the extent of the transferor’s retained beneficial interest. The DOR reached the same conclusion with regard to a transfer to a joint trust, a transfer to an irrevocable trust, and a transfer of a contingent remainder interest, finding in all three TAAs that, despite there being a conveyance of the real property, there was not a transfer of any present beneficial interest by the transferor. When using a FIGHT, the transferor retains a life interest, either a life estate (through the deed) or a right of use and possession (through the terms of the FIGHT) in the homestead. Because the transferor retains such an interest, there is no present beneficial interest in the homestead being transferred, and, therefore, the transfer of homestead to the FIGHT should not be subject to the doc stamp tax.
Additional support for no doc stamp tax upon a transfer of homestead to a FIGHT is found in TAA 12B4-001 (Mar. 6, 2012). In it, a transferor who owned encumbered real property sought an opinion from the DOR as to whether a conveyance of a life estate where the transferor retained the remainder interest would be subject to the doc stamp tax. The DOR took the “position that the transfer of an interest in property is not taxable if the deed transfers only a life estate interest, i.e., the right to possess and use the property for a time limited by the life of the grantee.”[42] Thus, the DOR determined that the transfer was not subject to the doc stamp tax because the transferor “continue[d] to own the fee simple title [in the real property] subject to the life estate.”[43] As established above, when using a FIGHT the transferor retains not only a life interest, but also the FIGHT is generally drafted so at a future point in time (usually when the youngest child of the transferor reaches the age of majority) fee simple ownership of the homestead will revert back to the transferor. Such a reversion is a form of remainder interest in the homestead property. Accordingly, the future reversionary interest retained by the transferor further supports the conclusion that doc stamp tax should not apply to a transfer of homestead to a FIGHT.
Thus, the combination of the transferor retaining a life interest and a future reversionary interest supports the conclusion that no present change of beneficial interest occurs upon the transfer of the homestead to a FIGHT. However, the DOR has not issued a ruling nor does it have a published opinion on the issue. Therefore, the DOR could take the position that a present beneficial interest was transferred, thereby triggering the doc stamp tax. If the DOR successfully takes such a position, then the doc stamp tax should only apply to the interest being transferred to someone other than the transferor. F.A.C.R. 12B-4.013(28)(c) explains that if the homestead property has a mortgage, then the doc stamp tax “is based on the other beneficiaries’ proportionate share of the mortgage indebtedness allocated according to their respective percentage beneficial interest.”[44] The administrative code provides the following example to illustrate this principle:
[I]f [transferor] owns real property valued at $100 which is encumbered by a mortgage of $50 and [transferor] conveys the property to the trustee of a trust of which [transferor] and [transferor]’s daughter are each 50% beneficiaries, and there is no consideration other than the mortgage, then stamp tax would be due based on a consideration of $25 (one-half of the mortgage indebtedness).[45]
The amount therefore due for doc stamp tax purposes would depend upon the present beneficial interest percentage being transferred.
If the transferor retains a life interest in the homestead transferred to the FIGHT, at most the only interest that could be considered being conveyed to someone other than the transferor would be the remainder interest. The doc stamp tax is a Florida law, not a federal law, so it would seem only appropriate that Florida tables be used for determining the value of the life estate and remainder interest transferred. The DOR does not appear to have a life estate and remainder interest table. However, another Florida state agency, the Department of Children and Families, does have such a table. Appendix A-17 of the ESS Program Policy Manual contains the life estate and remainder interest table with the stated purpose that the table is “used to determine the value of life estate and remainder interest held in real property.”[46] According to the Florida table, a 40-year-old has a life estate interest of 91.6% with the remainder interest being 8.4%. Accordingly, if a homestead with a $1 million mortgage is transferred to a FIGHT, and assuming the entire remainder interest is deemed a change in beneficial interest (ignoring the fact that the transferor has a reversionary interest), such transfer would subject only $84,000 (8.4%) of the mortgage to the doc stamp tax and result in a transfer tax of only $588 ($84,000/100 = $840 x $0.70).
Self-Settled Trusts
Florida has a strong public policy against protecting assets placed in trust by a transferor who is also a beneficiary of the trust, regardless of whether the trust has spendthrift provisions. This policy is codified in F.S. §736.0505, which addresses creditors’ claims against transferors of self-settled revocable and irrevocable trusts.[47] With regard to revocable trusts, property owned by the trust is subject to creditor claims “to the extent the [trust] property would not otherwise be exempt by law if owned directly by the [transferor].”[48] However, with regard to irrevocable trusts, a creditor of a transferor “may reach the maximum amount that can be distributed to or for the [transferor’s] benefit.”[49] The court in In re Brown, 303 F.3d 1261 (11th Cir. 2002), addressed a creditor’s claim against an irrevocable trust created by a transferor who was a beneficiary of the trust. The transferor created an irrevocable trust that paid a unitrust amount to the transferor for life, then to the transferor’s daughter for life, and, upon the daughter’s death, distributed the trust assets to charity. The trust agreement did not give anyone the discretion to invade principal. The court held that “[w]here the only interest a [transferor] has retained for herself under a trust is the right to income for life, it is solely this interest which her creditors can reach.”[50] In a footnote, the court did note that if additional benefits are retained by the transferor, such as the discretion to invade principal for the benefit of the transferor or a general power of appointment, trust corpus may also be available to the transferor’s creditors.[51] The retention of a general power of appointment would rightfully expose assets of a self-settled trust to a transferor’s creditors because the transferor would have retained the ability to convey the principal to himself or herself, his or her estate, and/or his or her creditors. However, where a transferor has only retained a LPOA in a trust where principal may not be distributed to the transferor, the LPOA should not expose the assets of the self-settled trust to the transferor’s creditors because none of the principal may be conveyed back to the transferor.[52]
A transferor’s reversionary interest in the homestead property causes the transferor to be a beneficiary of the FIGHT, which results in the FIGHT being a self-settled trust.[53] Fortunately, as explained above, property which would otherwise qualify as homestead when owned directly by a transferor should maintain its homestead creditor exemption when conveyed to or owned by a FIGHT. However, even if the transferor’s retained interest is determined to be insufficient to constitute a qualifying ownership interest in homestead property or the homestead exceeds the protected size limitations, the transferor’s creditors would appear to have limited recourse, if any. F.S. §736.0505(1)(b) and caselaw[54]only permit a transferor’s creditors to reach assets that can be distributed to or for the transferor’s benefit. If the FIGHT is properly drafted so as to avoid the devise restriction, then neither the transferor nor any other person (including the trustee) will have the ability to distribute or convey the homestead property to the transferor. The transferor’s future reversionary interest is contingent on the transferor surviving until a prescribed time or event. Until such time or event triggers, the FIGHT does not require, nor does it permit for any reason, the distribution of the homestead property to the transferor.
Common Law and Statutory Powers to Revoke/Amend
In a properly drafted FIGHT, the transferor does not “retain a power, held in any capacity, acting alone or in conjunction with any other person, to revoke or revest that interest in the transferor.”[55] However, despite the FIGHT being an irrevocable trust, it is still possible to amend and revoke the trust under the Florida Trust Code[56] and/or Florida common law.[57] If the Florida Trust Code or Florida common law were construed as a “retained power” of the transferor, then F.S. §732.4017 would be rendered completely ineffective at avoiding the devise restriction and contrary to its intended purpose. The white paper attached to the legislative position request form pertaining to the proposed enactment of F.S. §732.4017 provides that the explicit intent of the statute is to permit a transferor, who does not retain certain powers or rights, to make an inter vivos conveyance of homestead and avoid the devise restriction.[58] The polestar to interpretation of a statute is its legislative intent,[59] and “[i]t is a cardinal rule of statutory interpretation that courts should avoid readings that would render part of a statute meaningless.”[60] Accordingly, statutory and common law powers or rights should not be construed as a retained power of the transferor. Nevertheless, a transferor may attempt, out of an abundance of caution, to waive his or her statutory or common law rights to trust termination and modification.[61]
Married Couple with Minor Children
The use of the FIGHT is not limited to unmarried transferors with minor children. A transferor with a minor child from a prior relationship or who does not wish to explore a nuptial agreement (due to the optics), as well as a married couple with a minor child and significant equity in the homestead may also find a FIGHT desirable. The former is more likely to involve a situation where the homestead was owned by the transferor before marriage, and the latter is more likely to apply to jointly owned homestead. The analysis contained in this article applies equally to a FIGHT funded by a married couple’s conveyance of homestead, however, the analysis must be applied with respect to both spouses as transferors.
If the married transferor is the sole owner of the homestead (perhaps owned prior to marriage or by previous conveyance of one spouse’s interest), he or she may still use a FIGHT. But, such a lifetime conveyance of homestead will require, as previously discussed above, the consent of the non-transferring spouse (unless the non-transferring spouse previously waived his or her homestead rights[62]). The FIGHT may also be a preferred alternative to a nuptial agreement, as it does not require disclosure of assets and may not carry the negative perception or potentially difficult discussion of a nuptial agreement. The FIGHT structure may be used with the added benefit of including the non-transferring spouse within the class of permissible appointees of a lifetime LPOA. Such structure would permit the transferor spouse to convey the homestead to the other spouse prior to the expiration of the FIGHT term, and such transfer, although complete for gift tax purposes, would qualify for the gift tax marital deduction (unlike an exercise of the power in favor of a child or any other party) avoiding any gift tax or use of lifetime exemption.[63] Since the FIGHT is an irrevocable trust, non-transferring spouses should exercise caution when considering allowing a conveyance to a FIGHT because, once conveyed to the FIGHT, the non-transferring spouse is giving up homestead rights at death and rights to the asset upon divorce.[64]
The FIGHT may be structured as a lifetime qualified terminable interest property trust (completed gift with marital deduction) or spousal lifetime access trust (completed gift without marital deduction). The FIGHT may also potentially be structured as a Florida community property trust (potential for full FMV basis adjustment upon the death of the first spouse[65]). A detailed discussion of these alternate structures is beyond the scope of this article. Nevertheless, caution should be used if considering the community property trust structure. Under F.S. §736.151, the surviving spouse transferor may modify, regardless of the Florida community property trust being irrevocable, up to 50% of the trust. Such power may be considered a retained power by a transferor to revest himself or herself with the homestead, thereby triggering application of the devise restriction. While there is an argument against such application (as discussed above concerning common law and statutory abilities to amend a trust), the Florida Community Property Trust Act does not have legislative history supporting the intent to permit application of the devise restriction and, unlike the common law or previously discussed trust statutes, the transferor has the unilateral ability to revest upon the death of a spouse. However, as discussed above, it appears that spouses could waive this ability to amend upon the death of the first spouse.[66]
Alternatives to Irrevocable Homestead Trust
The devise restriction may be avoided without a FIGHT when there is a minor child through co-ownership of the homestead property. The transferor may alienate (convey) homestead property during life even when the transferor has a minor child. Therefore, the transferor could use a traditional life estate deed,[67] or title the property as joint tenants with rights of survivorship or tenants by the entirety, and the homestead property would not be subject to the devise restriction.[68] If the transferor co-owns homestead property, the transferor may still maintain his or her homestead creditor protection and tax benefits.[69]
The conveyance of homestead property to a business entity will also avoid the devise restriction, but the property will be reassessed for property tax purposes, be subject to doc stamp tax and loan acceleration if there is a mortgage, and homestead tax benefits will be lost.[70] Nonetheless, it may still be possible to receive the homestead tax benefits by using a 99-year lease.[71]
Conclusion
When drafting a FIGHT to avoid the devise restriction, it is imperative that the terms of the trust fit squarely within F.S. §732.4017. The transferor should retain no ability to amend or revoke the FIGHT, nor any ability to revest assets of the FIGHT back to the transferor. Giving the transferor a LPOA provides additional flexibility and, more importantly, avoids a completed gift upon the transfer of the homestead. However, the LPOA should only be exercisable during the transferor’s lifetime. Moreover, the permissible appointees should be limited to the other beneficiaries of the FIGHT (such as the transferor’s descendants) to clearly fall within F.S. §732.4017(2) and avoid the argument that the LPOA should be considered a “right of revocation.”[72]
Unless the transferor prefers that the homestead remain in the FIGHT indefinitely (to keep the assets deemed separate for family law purposes), the FIGHT will usually include provisions which cause the FIGHT to terminate upon the earlier of the transferor’s youngest child attaining age 18 or at such time there are no then living children of the transferor under age 18. The FIGHT may also terminate and/or be subject to other rules of administration upon the transferor’s death (such as division into creditor-protected separate trusts for each of the transferor’s children). Caution should be exercised if the FIGHT provides an unrestricted withdrawal right or requires distribution to the trust beneficiaries, because the real property may be exposed to the creditors of the beneficiaries.[73] However, if the beneficiaries lived in the home during the life tenant’s lifetime, made the home their residence, and helped with the expenses and upkeep of the home, then the beneficiaries may be able to claim their own homestead exemption through their remainder interest.[74]
The beneficiaries of the FIGHT may be the transferor, the transferor’s spouse, the transferor’s descendants, or any other party the transferor desires to include. However, the transferor’s beneficial interest in the FIGHT should be limited to use and possession of the property to avoid the devise restriction and minimize the property’s exposure to a potential creditor of the transferor. Therefore, language to create an equitable interest in real property for the transferor should be incorporated into the FIGHT, as doing so assists with maintaining the tax benefits and avoiding the acceleration of any mortgage on the homestead.
Remember, the FIGHT is a unique trust with a highly focused purpose to avoid devise restriction during the period that a transferor has a minor child, while simultaneously maintaining homestead creditor protection and tax benefits for the transferor. While the FIGHT is not for everyone, it is a complex tool to be aware of and great caution should be exercised when drafting a FIGHT to ensure proper compliance with F.S. §732.4017. Enjoy the cake, and bon appétit.
[1] Term is defined in the first course of this article. Other terms are also defined in the first course. If a term is capitalized and not defined in the second course, please refer to the first course.
[2] Such as upon the youngest child turning 18 years old or no living children under age 18.
[3] I.R.C. §2036 (inclusion for possession or enjoyment, as well as due to a lifetime power to appoint); id. at §2038 (inclusion for the ability to alter the enjoyment through lifetime power to appoint).
[4] Id. at §2037.
[5] Id. at §1014.
[6] Id. at §2511.
[7] Id. at §2702 (full FMV when remainder is to family because the retained life estate is valued at zero); see also Bruce Stone, Florida Homestead: the Legal Chameleon that Grew Into a Dragon (unpublished manuscript, on file with the author of this article) (“[I]f a homestead owner conveys homestead into an irrevocable trust which makes the desired provisions for the owner’s family members, and in which the owner has no beneficial interest or powers of appointment, and the owner retains a life estate in the residence…that gift will be subject to gift tax on the full fair market value of the residence…without any reduction…because of [IRC] [§]2702.”).
[8] Note the power of appointment should be limited to the transferor’s lifetime, and no testamentary power of appointment should be held by the transferor as such would trigger the devise restriction, defeating the purpose of the FIGHT.
[9] Treas. Reg. §25.2511-2(b)-(c).
[10] See generally I.R.C. §§671-677.
[11] $250,000 exclusion of gains if single, and $500,000 exclusion if married. See also Treas. Reg. §1.121-1(c)(3)(i) (“If a residence is owned by a trust, for the period that a taxpayer is treated under [§§671-679] (relating to the treatment of grantors and others as substantial owners) as the owner of the trust or the portion of the trust that includes the residence, the taxpayer will be treated as owning the residence for purposes of satisfying the two-year ownership requirement of §121, and the sale or exchange by the trust will be treated as if made by the taxpayer.”).
[12] I.R.C. §674. The transferor may also consider giving an unrelated third party the power to add a charitable beneficiary to the trust. Id. Other situations may trigger grantor trust status depending on the identity of the income beneficiaries. See id. §673 (reversionary interest triggers grantor trust status if a spouse or unrelated party is an income beneficiary); id. §677 (grantor trust status if grantor or grantor’s spouse is an income beneficiary or if trust assets may be used to pay life insurance premiums on the life of the grantor or grantor’s spouse).
[13] 12 U.S.C. §1701j-3(d).
[14] See also Jeannette Mora, Garn-St Germain and Exceptions to Due-On-Sale Clauses, ActionLine 40 (Spring 2023).
[15] 12 U.S.C. §1701j-3(d)(8).
[16] Fla. Stat. §736.0103(4).
[17] 12 U.S.C. §1701j-3(d)(6) (exception from loan acceleration for “a transfer where the spouse or children of the borrower become an owner of the property”).
[18] Id. at §1701j-3(d)(5).
[19] Fla. Stat. §196.041.
[20] Id. at §§196.031 and 196.041.
[21] Id. at §193.155(3)(a)(1)(b).
[22] Id. at §193.155(3)(a)(1)(c).
[23] A “conveyance of an interest that meets the requirements of [F.S. §732.4017] will not cause the homestead owner’s retained interest to be revalued for assessment purposes, as long as the person conveying the interest retains a life estate or other interest that qualifies as homestead for real property tax purposes under current law.” RPPTL, White Paper for §732.4017, https://www.rpptl.org/uploads/732.4017_White_Paper_08_01_09.pdf.
[24] There are other events such as changes, additions, or improvements to the homestead that can trigger some level of reassessment (albeit not necessarily a full reassessment to FMV).
[25] The except in F.S. §193.155(3)(a)(3) does not apply because the homestead does not pass under F.S. §732.401 (devise and decent).
[26] In accordance with F.S. §196.041(2).
[27] Fla. Stat. §201.02(1)(b)(6) (emphasis added).
[28] Fla. Stat. §201.02(1)(b)(6).
[29] Id. at §201.02(1)(a).
[30] F.A.C.R. 12B-4.012(2)(a).
[31] Id. at 12B-4.014(2).
[32] Id. at 12B-4.013(18), (21).
[33] Some attorneys, perhaps trying to avoid the doc stamp tax analysis on a conveyance to the trustee of a revocable trust, utilize language from F.S. §689.071(6). The Land Trust Act allows the settlor of a land trust to declare the beneficial interests in the trust to be personal property, rather than real property. Caution should be exercised before applying this approach because a savvy creditor might argue that the homestead protection from creditor claims only applies to an interest in real property. Given the current treatment of property titled in the trustee of a revocable trust for doc stamp tax purposes, it is not necessary, and perhaps dangerous, to declare the beneficial interests in the trust property to be personal property.
[34] Emphasis added. Historically, F.A.C.R. 12B-4.013(28) has also been applied to trusts created under Ch. 736 and appeared to be the position of the Florida Department of Revenue (DOR) as well. See TAA 09B4-003; TAA 94(M)-008; TAA 93(B)4-014R. However, in 2018 the DOR in TAA 18B4-003 took the strict position that subparagraph (28) only applied to land trusts and not to trusts created pursuant to Ch. 736 and seemingly ignored the expressed purpose provided in Fla. Stat. §201.02(1)(b)(6). Most practitioners disagree with the conclusion reached by the DOR, and many believe the DOR was incorrect in its analysis. See Alan Gassman & Peter Donovan, The Florida Documentary Stamp Tax and Revocable Living Trusts — A Swamp of Confusion for the Department of Revenue, LISI Estate Planning Newsletter #2864 (Feb. 17, 2021), http://www.leimbergservices.com. Despite the 2018 TAA, the DOR in 2020 issued TAA 20B4-003, which held that a lady bird deed does not trigger the doc stamp tax. The basis of the DOR’s position was that the “Lady Bird Deed, does not transfer any present beneficial interests in real property.” The DOR does not provide any citations in reaching its conclusion. Fla. Stat. §201.02(1)(b)(6) and F.A.C.R. 12B-4.013(28) appear to be the only sections that would provide justification for the DOR’s position in the 2020 TAA, and would appear to indicate the DOR has acknowledged the expressed purpose of the doc stamp tax and moved away from its strict interpretation in the 2018 TAA.
[35] F.A.C.R. 12B-4.013(28)(a) (emphasis added).
[36] Id. at 12B-4.013(28)(b).
[37] TAA 09B4-003 (Apr. 14, 2009).
[38] Id.; see also DOR Letter of Technical Advice to Nicolette Gudknecht (Jan. 30, 2024) (noting that the conveyance of encumbered property owned by spouses to a joint trust was not a change of beneficial interest and doc stamp tax would not apply).
[39] TAA 2004(B4)-011 (Dec. 2, 2004) (citing Rule 12B-4.013(32), which is identical to the current Rule 12B-4.013(28)); see also AskDOR (Jan. 18, 2024) (on file with author of article) (responding that a transfer to a QPRT was not a change of beneficial ownership and no doc stamp tax was due).
[40] TAA 20B4-003 (Oct. 16, 2020).
[41] Id.
[42] TAA 12B4-001 (Mar. 6, 2012).
[43] Id.
[44] F.A.C.R. 12B-4.013(28)(c) (emphasis added).
[45] F.A.C.R. 12B-4.013(28)(c).
[46] Florida Department of Children and Families, Life Estate and Remainder Interest Tables, https://www.myflfamilies.com/sites/default/files/2023-05/a_17.pdf.
[47] If no spendthrift provision is applicable, Fla. Stat. §736.0501 allows a creditor of a beneficiary to “reach the beneficiary’s interest by attachment of present or future distributions to or for the benefit of the beneficiary or by other means.” A detailed analysis of this statute’s potential application to self-settled trusts is beyond the scope of this article, however, the Florida Trust Code Scrivener’s Summary (May 21, 2006) prepared by the Real Property, Probate & Trust Law Section of The Florida Bar states that Fla. Stat. §736.0501 applies to “third party trusts” and “[i]mportantly, the rights given to creditors under the section are limited to those cases where a beneficiary has a right to distributions.” (Emphasis added.) The FIGHT would be considered a self-settled trust and not a third party trust. More importantly, distributions to the transferor should not be permitted by the FIGHT. Lastly, if Fla. Stat. §736.0501 were applicable to a self-settled trust, then there would be no purpose for Fla. Stat. §736.0505 to exist. See Forsythe v. Longboat Key Beach Erosion Control Dist., 604 So. 2d 452, 456 (Fla. 1992) (“It is a cardinal rule of statutory interpretation that courts should avoid readings that would render part of a statute meaningless.”). Instead, it would appear that for the application of self-settled trusts the specific Fla. Stat. §736.0505 should apply and not the general Fla. Stat. §736.0501. See Palm Beach County Canvassing Bd. v. Harris, 772 So. 2d 1273 (Fla. 2000) (“Where two statutory provisions conflict, the specific controls the general.”).
[48] Fla. Stat. §736.0505(1)(a).
[49] Id. at §736.0505(1)(b); see also Drexia Credit Local v. Rogan, 624 F. Supp. 2d 970 (N.D. Ill. 2009) (holding that creditor recovery against the trust was “limited to the maximum amount that the settlor-beneficiary could receive from the trust’s income and corpus, e.g., just income if the settlor can only receive income, or the entirety of the trust corpus if the settlor can receive the entire corpus” when addressing, in part, application of Florida law to a self-settled trust).
[50] In re Brown, 303 F.3d 1261, 1268 (11th Cir. 2002); see also Henderson V. Sunseri, 234 Ala. 289 (Ala. 1937) (finding that creditors could reach income and not principal of self-settled trust created by debtor-transferor where transferor retained right to income only).
[51] In re Brown, 303 F.3d at fn 10 ; see also Bank of Dallas v. Republic Nat’l Bank of Dallas, 540 S.W.2d 499 (Tx. 1976) (finding creditors could reach assets in trust where transferor of self-settled irrevocable trust could receive discretionary principal distributions and had a general power of appointment).
[52] See Egbert v. De Solms, 218 Pa. 207 (Pa. 1907) (“The power of appointment by the settlors in regard to the respective shares in which the children should take did not in any way diminish the estate of the remaindermen, or reserve to the settlors any interest which would invalidate the trust in favor of their creditors. The income, however, reserved to the settlor during his life, no matter how carefully guarded for his own use, was assets for payments of his debts.”).
[53] Fla. Stat. §736.0103(4) (a beneficiary of a trust includes “a person who has a present or future beneficial interest in a trust, vested or contingent”).
[54] In re Brown, 303 F.3d at 1268.
[55] Fla. Stat. §732.4017(1).
[56] Id. at §§736.04113, 736.04115, and 736.0412.
[57] Preston v. City Nat’l Bank of Miami, 294 So. 2d 11 (Fla. 3d DCA 1974) (Under Florida common law, “[t]he terms of a trust may be modified if the [grantor] and all the beneficiaries consent.”).
[58] RPPTL, White Paper for §732.4017.
[59] Borden v. East-European Ins. Co., 921 So. 2d 587, 595 (Fla. 2006) (“It is a fundamental principle of statutory interpretation that legislative intent is the “polestar” that guides this Court’s interpretation.”); see also Maggio v. Fla. Dep’t of Lab.r & Emp’t Sec’y, 899 So. 2d 1074, 1076 (Fla. 2005).
[60] Forsythe v. Longboat Key Beach Erosion Control Dist., 604 So. 2d 452, 456 (Fla. 1992).
[61] Demircan v. Mikhaylov, 306 So. 3d 142 (Fla. 3d DCA 2020) (disagreeing with trustee’s argument that the settlor waived his right to revoke and amend the trust and therefore the common law rule of trust termination from Preston was also waived, but implying that such right could be expressly waived).
[62] Waiver is possible through a nuptial agreement (see Fla. Stat. §732.702) or a prior deed containing the statutory homestead waiver language (see Fla. Stat. §732.7025; however, if using the deed waiver, it is prudent to ensure full and fair disclosure of assets has occurred among spouses).
[63] I.R.C. §2523.
[64] Equitable division of assets upon dissolution of marriage does not apply to irrevocable trusts even when created during marriage and funded with marital assets. See Nelson v. Nelson, 206 So. 3d 818 (Fla. 2d DCA 2016); Oxley v. Oxley, 695 So. 2d 364 (Fla. 4th DCA 1997). However, if marital assets are used to pay down homestead mortgage or homestead expenses, the property could become subject to equitable division. F.S. §61.075(6)(a)(1)(b) and (c).
[65] For more detailed discussion on the Florida community property trust, see Joseph M. Percopo, Understanding the New Florida Community Property Trust, Part I, 96 Fla. B. J. 16 (Jul./Aug. 2022).
[66] See Demircan, 306 So. 3d 149 (implying that waiver of common law right is possible). Nevertheless, before waiving, one must consider whether the waiver of such right impacts the potential for basis adjustment as community property under I.R.C. §1014(b)(6), thereby negating the potential purpose of structuring a Florida community property FIGHT.
[67] Note that this does not include an enhanced life estate deed (aka, a lady bird deed).
[68] Fla. Stat. §732.401(5); see also Marger v. De Rosa, 57 So. 3d 866 (Fla. 2d DCA 2011).
[69] See Joseph M. Percopo, The Impact of Co-Ownership on Florida Homestead, 86 Fla. B. J. 5 (May 2012).
[70] See Joseph M. Percopo, Transferring Real Property into Limited Liability Companies in Florida: Benefits and Considerations, 97 Fla. B. J. 4, fn. 14 and accompanying text (Jul./Aug. 2023).
[71] See Geraci v. Sunstar EMS, 93 So. 3d 384 (Fla. 2d DCA 2012); Higgs v. Warrick, 994 So. 2d 492 (Fla. 3d DCA 2008).
[72] If the LPOA is exercisable in favor of anyone other than the transferor (and the transferor’s creditors, estate, and legal obligations), such broad retained power would allow an argument that the limitation is illusory and, as such, is akin to the transferor retaining a power to revoke and revest the trust assets back to the transferor. Leaving this door open is less than ideal. If such an argument is successful, not only is the devise restriction applicable, but it may further expose trust assets to creditors of the transferor. See Bruce Stone, Florida Homestead: the Legal Chameleon that Grew Into a Dragon (unpublished manuscript, on file with the author of this article).
[73] Remainder interest holder was not entitled to homestead protection where the remainder interest holder did not reside on the property during lifetime of the life tenant. See Aetna Ins. Co. v. LaGasse, 223 So. 2d 727 (Fla.1969); Anemaet v. Martin-Senour Co., 114 So. 2d 23, 27 (Fla. 2d DCA 1959).
[74] See In re Hildebrandt, 432 B.R. 852 (Bankr. N.D. Fla 2010); In re Williams, 427 B.R. 541 (Bankr. M.D. Fla. 2010).
Joseph M. Percopo, LL.M, AEP, practices law in Orlando with Dean Mead. His practice concentrates on estate & trust planning, estate and trust administration, asset protection planning, business, and tax law. He is a graduate of the FSU College of Law with highest honors and earned his Master of Laws in taxation from the University of Florida Levin College of Law Graduate Tax Program. Percopo is president of the Central Florida Estate Planning Council, and a former RPPTL Section fellow and graduate of the Florida Fellows Institute of the American College of Trust and Estate Counsel. The author dedicates this article to his late grandmother, Eileen Brigman.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Sarah Swaim Butters, chair, and Allison Archbold and Homer Duvall, editors.
