Homestead

CHAD: All right. So, we’ll move on to another one. Especially here in Florida, it’s a phrase that’s passed around pretty commonly. It’s homestead. So I think, first, it’d be great if you can let everyone know what homestead is. Everyone thinks it just always refers to the house. We pay less taxes — property taxes — because it became homestead. But I think, you know, there’s a lot more to it. And so I think giving that basic understanding would be great.

BARRY: Yeah, so I would say homestead is a monkey wrench in estate plans. I think there’s a lot of attorneys that really don’t fully understand how it works. And non-attorneys are really at a disadvantage as to some of these rules. So, big picture, three things you gotta know about homestead. Three things.

Number one, and you probably already know this– Number one, asset protection. Your house is sacred. It’s your castle. Nobody’s taking away from you with a few exceptions. Some of those exceptions are: you don’t pay your taxes, you remodel your kitchen and then you try to rely on the asset protection benefits and say I’m not going to pay you. That can result in what’s called a construction lien. And they can definitely put a lien on your house and sell your house.

But other than those exceptions, you know, a few exceptions, nobody’s taking your house away from you if it’s homestead. Now, it doesn’t have to be filing anything to be homestead. It doesn’t have to be declaring it homestead. If it’s your primary residence — with a couple of qualifications — it’s your homestead. And it’s exempt from credit risk.

Number two, there is that tax benefit that you mentioned. Tax benefit is– You gotta lean forward because your hair is disappearing. And you have beautiful hair, you gotta let them see it. Number two is the tax benefits. It’s real estate taxes. It manifests itself in two ways. Number one, there’s like a slight haircut on the value in which your property is appraised for real estate tax purposes. Yeah, there you go. So, there’s a slight haircut on the total value appraised and assessed. Number two, your real estate taxes that are assessed each year cannot go up by a certain amount. They’re capped. The millage rate is capped.

So, for an example, if you have a house that’s, like, identical, and you buy it today, and the person next door has the same house and they bought it 30 years ago, your taxes are going to be based on today’s value, which is presumably double the value of your neighbor. Your neighbor’s taxes kind of inched along over that time. They might be double the value of the taxes. Same house, same value.

CHAD: Could be, I guess, a sticker shock after the first year.

BARRY: Yeah, it’s not pleasant. It’s not pleasant. And so if it’s not your primary residence, it’s a rental property, you don’t get that protection. So your real estate taxes will probably go up every year substantially. Don’t mess with Homestead, though. It’s a crime if you play games. And they can figure it out. They’re smarter than you think. So don’t play games.

The third thing that is important to understand, I think is the biggest and in my world the most commonly misunderstood, is the inheritance rules when it comes to Homestead. Basically, the Homestead is designed to stay in the family, whether you like it or not. If you’re married and you have no minor kids, you can do a prenup or a postnup, and you can not give it to your spouse. But if you don’t have a prenup or a postnup, you have no kids, your spouse is getting that property whether you like it or not. If you try to give it to someone else– So if I give it to Chad instead of my wife, my wife’s still going to get it, but she’s going to get it in a different way that I probably didn’t think of called a life estate. There’s now new rules on making elections, but we’re not going to get into that.

Bottom line is that if you have a spouse and you have minor kids, they’re going to get the house whether you like it or not. And if you deviate from the rules, it’s going to go to these people in some way — a life estate or they can make an election. So there’s a lot of limitations on what you can do with your planning, and you need to know the rules so you don’t run afoul of them, which really will throw a monkey wrench in.

CHAD: I think you got a good segue there in terms of the spouse and maybe the spouse not receiving the house. Obviously, that refers to the house, but what happens if two people are married and one spouse tries to really disinherit the other spouse? Not leave anything to her in terms of other financial assets. Is there any recourse for that surviving spouse, and how does that work?

BARRY: So you’re asking about disinheriting a spouse?

CHAD: Yep.

BARRY: If you want to disinherit a spouse in Florida, you have to move to Georgia. Georgia, I believe, is the only state where you can disinherit your spouse. Florida and New York — where, again, we have an office in Long Island — are states where your surviving spouse has a right to a minimum of the estate.

The minimum in Florida is 30 percent. It’s called — it’s actually really interesting — it’s called the elective estate. Elective. It makes sense. Your spouse has a right to elect. To take what you gave her or him in your estate planning documents or elect more if you were not very nice and gave him or her less.

So, say you give your spouse 50 percent. Half. They’re not going to elect 30 percent. At least I don’t think they would. Maybe they would. Say you gave your spouse 5 percent. Well, maybe now they might, you know–

CHAD: Line up the right advisors.

BARRY: Yeah, that’s smart. So they might elect to, you know, take more because they can.

Now what’s interesting about it is that the elective estate — a lot of new rules on this — the elective estate is bigger than the probate estate. So probate’s like, you know, is it in your name or not?

CHAD: Bigger meaning more stuff can come into it.

BARRY: Yeah, exactly. So the elective estate is like a laundry list. A long laundry list of things that are included in the elective estate. The first one’s a probate estate. Then they add a bunch of things that are not probate assets, like certain kinds of life insurance. Things that pass directly to the person outside of court actually come back in for purposes of computing the value that the surviving spouse is entitled to when they make an election. It’s very interesting what’s included, what’s not included, how it works. There’s very strict timelines on this, so you really got to be careful. But the point is — you brought it up — surviving spouses have rights.

CHAD: I brought it up because it’s on the list.

BARRY: Okay. Don’t take credit then. Don’t take credit. So yeah, I think that’s an interesting area. We get those questions a lot. So, you know, number nine–

CHAD: One thing everyone could probably see is that everything is really integrated. All this stuff really kind of works together.

BARRY: Yeah. It’s a lot of moving parts. I like to call it a Rubik’s cube, because when you’re talking about thoughtful estate planning, you’re thinking of, you know, probate, tax, family law, inheritance law, asset protection, and guardianship practicality. You know, a lot of moving parts, and everybody has different goals. So it’s a lot to think through.

But the bottom line is that, you know, failure to think through these things is going to result in surprises. It could be unpredictable, could be expensive, could be a lot of court, and there could be tax consequences like you saw with the IRAs. If the exemption comes down, you could be paying 40% to the government above the threshold, which 20 years ago was a million dollars. I mean imagine that, you know.

So it’s a lot to juggle. It’s definitely a complicated area of the law. We don’t recommend doing it yourself. Not for self-serving reasons, other than the fact that I get paid a lot of money to clean it up all the time. And it’s very sad to see a family that’s dealing with that.