What to Do with an Estate with Foreign Assets (Even that “Little” Bank Account in Europe)
Florida offers many advantages as a retirement haven compared to northern states (including no state income taxes and better weather). Another Florida feature (lesser-known but still quite important) is its homestead laws.
"Homestead" can be a deceptively complex issue in snowbirds' estate and tax planning when they finally become Florida residents, including asset protection, property tax savings, and restrictions on the estate plan.
Florida's asset protection for homesteads is anchored in the state's constitution (Article X, Section 4). Homestead property owned by a natural person is protected from forced sale under process of any court or judgment lien (except for obligations relating to the real estate itself, such as property taxes, mortgage principal and interest, and contractors' liens).
The asset protection for homestead includes land and improvements on the land, with an acreage limit of up to 160 contiguous acres outside a municipality, and one-half acre inside a municipality.
Florida also offers two sorts of property tax savings for homestead property: (1) the "$50,000 exemption" and (2) the "Save Our Homes" limit on annual property tax increases.
The "$50,000 exemption" (required by Article VII, Section 6 of the state's Constitution and codified at F.S. 196.031) is a reduction of up to $50,000 in the assessed value of the homestead property. A homeowner can apply for this exemption by filing a Form DR-501 at the county appraiser's office.
The $50,000 homestead exemption is helpful as far as it goes, but it doesn't go very far. (For example, the Sarasota County 2014 millage rate was a little over 13.3, so the $50,000 exemption would have saved a homeowner in that county approximately $665.)
The "Save our Homes" advantages for homestead property approved by Florida's voters as a constitutional amendment in 1992 are much more economically significant. Contained in Article VII, Section 4 of the Constitution, they limit annual increases in property assessments to the lesser of 3% or the annual increase in the Consumer Price Index.
As shown in this illustration from the Orange County Property Appraiser, over time (and especially when Florida's real estate market is appreciating), annual "Save Our Homes" advantages can be substantial.
The asset protection and property tax savings advantages for Florida homestead property are accompanied by related estate planning restrictions. This is because Article X, Section 4(c) of the Constitution and F.S. 732.4015 provide that homestead property is not subject to devise if the owner is survived by a spouse and/or minor children.
If a married couple does not have minor children, however, the homestead property may be devised to the surviving spouse. When a married couple has a least one minor child, the only permissible devise of homestead property is a life estate to the surviving spouse, with a vested remainder to the decedent's descendants, per stirpes.
For any snowbirds who have become (or might become) Florida residents, asset protection concerns and property tax issues should be evaluated carefully on a case-by-case basis when taking title to Florida property.
In addition, Florida's homestead law has significant estate planning implications for snowbirds moving south when they update their estate plans. Common "credit shelter" or "A-B" estate plans may contemplate funding trusts in the estate plan with residential property.
This technique may not be available for Florida residents, because of the constitutional restrictions on devise of homestead property. (Jeff Baskies has written an excellent in-depth article, available here, that explains how disclaimer funding of a credit shelter trust may provide a workaround.)
Thoughtful planning can help snowbirds adopting Floirda residency achieve maximum advantages from Florida's homestead property, while avoiding unintended pitfalls.