Homestead Exemption in Regard to Living Trusts
You can use a revocable living trust or an irrevocable living trust in your estate planning to hold your homestead-exempt property. The goals behind this are to avoid probate, protect the homestead property from creditors and to leave the property to your named beneficiary. Each state has its own criteria as to what type of property qualifies as homestead. However, the homestead exemption attaches to the homeowner and not to the home. The type of living trust you select determines whether you get to keep your homestead exemption or lose it.
About Homestead Exemption
The homestead exemption reduces the taxable value of your primary residence. To qualify, you must apply for the exemption through your local property appraiser’s office. You can only declare the homestead exemption on one residence regardless of how many homes you own. Depending on your state’s laws and your personal circumstances, all or part of your residence’s taxable value may be tax exempt. Most states provide an additional exemption if you are over 65 years old, blind or a disabled veteran that further reduces the taxable value.
Revocable Living Trust
With a revocable living trust, you transfer ownership of your residence by retitling it in the trust’s name. This makes the trust the legal owner of the property. However, you still maintain control over the homestead property. You can remove the homestead property from the trust, amend the trust or revoke the trust entirely at your discretion. At the time of publication, the tax courts have ruled that because you still control the property, you keep the homestead exemption even though the trust owns the property.
Irrevocable Living Trust
When you place property into an irrevocable trust, you transfer your right to own and control your residence to the trust. You no longer have the option of removing the house from the trust or revoking or amending the trust at will. The homestead property remains in the trust indefinitely. Because the homestead exemption remains with the owner, you may lose the homestead exemption once the trust takes title to the property. Whether you retain or lose the exemption depends on how your attorney drafts your irrevocable trust.
Creditor Protection and Living Trusts
Whether you can protect your homestead property from creditors by placing it in a living trust depends on your state’s laws. In many states, court rulings have been inconsistent in resolving this dilemma. For example, at the time of publication, Florida courts are undecided about whether a living trust protects homestead property from a creditor’s reach. The courts have ruled for the creditor in some cases and for the living trust in others. Your estate planning attorney can advise you on whether keeping your homestead property out of a trust might be a better option for you.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.