During Legally Mine’s presentations across the nation, we get asked a lot of questions. I thought that part of my managing this blog would be to be preemptive in answering some of the questions that get brought up and hopefully provide some further thought and discussion. The following are some thoughts on the various homestead laws (This is some information coming from the Asset Protection Bible, a decent resource for some strategies when it comes to learning about how legal structuring can work in your favor):
- Homestead Law – Homestead laws are state laws that protect personal homes from creditors. They originated to prevent homeowners from losing their homes because of other debts or obligations, and have since been expanded into the bankruptcy courts to protect homes, up to certain stated values, from being attachable in bankruptcy actions.
Protection of Assets. These laws vary extensively among the various stares. For example, some states offer zero protection (such as New Jersey and Pennsylvania) or only protect a minimum amount of equity in the home and other assets (such as $5,000 in Alabama or $3,500 in Michigan). Other states (such as Florida and Texas) provide almost unlimited protection for a home, even for values extending into the millions of dollars. Some state laws will also protect the tools used in a trade or business.
Other Considerations. While homestead laws provide some limited protection to your home, there are three limitations that you should consider.
a) Assets protected by the respective state’s homestead exemptions are fairly strictly construed such that only the stated statutory amount is the amount protected; therefore, equity in a home that exceeds the homestead exemption may be vulnerable to judgment creditors. If you have $150,000 in equity in your home, bur your state only protects $40,000 under the homestead exemption, you would be vulnerable for $110,000 of equity.
b) Also, because federal law can supersede state law, the home is often not protected from US agencies such as the Internal Revenue, Environmental Protection, Labor Department, Drug Enforcement, and Immigration. A recent trend in federal laws has begun to reduce the protection previously offered by homestead laws in various stares. This suggests a stronger emphasis on the homeowner establishing legal entities to protect equity in the home.
It is interesting, and yet extremely troubling to note, that recent case decisions have expressly established the federal government’s right to summarily seize a personal residence in spite of state homestead exemptions. While the homestead exemption may insulate a family residence from seizure under state law, the federal courts have held that the federal forfeiture statutes preempt these state homestead exemptions.
However, placing a personal residence into a Limited Partnership or other asset protection entity can provide a defense to any federal seizure of the property. The “innocent owner” defense included in the major federal forfeiture laws protects a larger class of transferees than those protected by criminal forfeiture statutes. Since generally the “innocent owner” must show only that he or she did not have actual knowledge of the illegal activity, it would be unlikely that a Limited Partnership or other asset protection entity, which are separate entities for seizure purposes, could have had actual knowledge of the illegal activity.
c) You should also be aware that placing a personal residence into an entity such as a Limited Partnership or a Single Member LLC will often preclude any existing homestead protection that may exist. Thus, while you gain the increased protection afforded by the asset protection entity, you surrender the homestead exemption in the process. Often, however, the homestead exemption is significantly inferior to the protection offered by a Limited Partnership.