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Home » Homestead Exemption » Bankruptcy Law Treatment of Homestead Purchased in Debtor’s Living Trust

Bankruptcy Law Treatment of Homestead Purchased in Debtor’s Living Trust

ByGideon Alper February 8, 2016May 22, 2020

One of my clients had purchased a Florida homestead for all cash about five years ago, and he was now contemplating filing Chapter 7 bankruptcy. He asked me whether it made a difference that he took title to his homestead in a revocable living trust instead of his own name. The client was concerned about a section of the Bankruptcy Code which gives the trustee the right to undo transfers to a self-settled trust made within ten years prior to filing bankruptcy. A living trust is a type of self-settled trust that is widely used for normal estate planning. This client stated he established his living trust as part of his own estate planning process.

It would defy common sense to believe that bankruptcy debtors who set up a living trust for family planning would expose any funding of the trust if they filed bankruptcy in the ten years after the transfer. The great majority of estate planning involves living trusts with no consideration of asset protection or prospective bankruptcy. In fact, the legislative history of the particular provision of the Bankruptcy Code clearly shows that Congress was targeting “asset protection trust” created under the laws of certain states (Alaska, Delaware, Nevada etc) that have statutes about self-settled trust designed to protect assets from creditors. I do not believe bankruptcy law would permit a trustee to reverse transfers of homesteads, money, securities, or any other assets for ten years after the debtor contributed the assets to an estate planning living trust.

There is another provision of the Bankruptcy Code which permits a ten year look-back on the purchases of homestead properties. A trustee may attack the purchase of a homestead property exempt under state law where the purchase of equity occurred within ten years of the bankruptcy filing where the trustee can show the purchase was done to avoid or delay creditors.

If there is no provable intent to convert money in to a Florida homestead within 10 ears of bankruptcy then the homestead exemption falls under Florida state law. Despite the Florida Constitution’s reference to homestead protection only for “natural persons” there are several Florida appellate decisions that treat a debtor’s living trust as a natural person for homestead purposes.

I do not think it matters under bankruptcy law whether my client’s homestead is owned in his living trust that he made for estate planning. If there were evidence of my client’s intent to buy the homestead for all cash to shield the money from creditors the bankruptcy trustee would probably attack the purchase under the above-referenced Code provision relating to homestead purchase and not the provision pertaining to so-called asset protection trusts.

Last updated on May 22, 2020

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Gideon Alper

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