Protection for Cash in Homestead Accounts

I’ve recently been fielding a lot of questions about asset protection for homestead properties. Florida’s homestead exemption offers excellent protection. Texas asset protection laws also afford strong protections to the homestead. One question that comes up from time to time relates to cash received for the sale of a homestead. I recommend that clients keep such cash in a completely segregated account, or a homestead account. A homestead account is an account that contains only money from the sale of a property that was protected under homestead exemption laws. This must be a segregated account that contains no other money, and courts are usually pretty good about protecting segregated homestead accounts from creditor claims, especially in the context of bankruptcy.

Duration of Protection

The beautiful feature of homestead protection is that it lasts forever, and you don’t typically have to jump through many hoops to get it. It’s the  ultimate asset protection tool, because in states where the exemption is unlimited (e.g. Florida and Texas), one can invest all their money into a homesteaded property and effectively protect wealth (though it’s certainly not the best way to grow wealth) without having to worry about other asset protection tools.

Again, the duration of the homestead exemption is forever, but how long is the protection from creditors afforded to homestead accounts? There isn’t a clear answer on that. Time is certainly a factor, but there are many other factors to consider as well. A bankruptcy court in Florida recently considered this question and allowed the debtor to exempt a 13 month old homestead account from creditor claims. While that seems generous (and I don’t recommend trying to hold a homestead account for that long), the court weighed several factors besides time alone in reaching its decision.

In reaching its decision, the court noted that during the 13 month period, the debtor seriously considered the purchase of between 6 and 12 different houses. The debtor also submitted written offers to purchase three different homes, and the debtor actually signed a contract on another home. Unfortunately none of the deals came to fruition, even though the prices offered were reasonable in the opinion of the bankruptcy judge. In one case, a contract for purchase simply fell apart because of structural issues revealed in the home after a professional inspection.

Homestead Account Advice

While the Florida case described above certainly extends a measure of protection for homestead accounts in Florida, its not applicable in states outside of Florida. Homestead laws vary drastically from state to state. Some states provide absolutely no homestead protection, while others like Texas and Florida give unlimited protection.  If you live in a state where the laws are not favorable to homesteads, you need to consult with an asset protection attorney to determine how you can safely and legally protect your wealth and hard earned assets.

While homesteads can present a challenge from the standpoint of estate planning for couples that don’t want to use homesteads as a non-probate asset, the cost of more involved estate planning is a small price to pay for the asset protection benefits garnered from the statutory (or constitutionally) derived mechanism.

What OJ Simpson Can Teach Us About Domestic Asset Protection

OJ Simpson made a lot of mistakes, but one thing he did right was put good asset protection planning in place. In fact, OJ played the asset protection game to near perfection, and he didn’t even use an offshore asset protection trust. We can all learn a little something from the asset protection tools that OJ used for protection from lawsuits. Though Simpson more or less “lucked” into his asset protection plan, with the help of an asset protection attorney, you can implement an asset protection strategy that’s even more effective than OJ Simpson’s.

Federal Asset Protection

OJ Simpson began his NFL career playing for the Buffalo Bills. As part of his compensation, OJ received an NFL defined benefit retirement plan, which was in place for the duration of his professional football career. Fast forward thirty years to 1999. By 1999 OJ had been acquitted of double homicide by a “jury of his peers.” The bad news was that in 1997 the Brown and Goldman families had won a $33.5 million dollar civil judgment against Simpson. See Rufo v. Simpson, 103 Cal. Rptr. 2d 492, 497 (Cal. Ct. App. 2001).  Despite losing the civil case, Simpson’s defined benefit retirement plan (valued at more than $4 million) was “off limits.” In other words, the judge presiding over the civil case ruled that OJ’s retirement plan could not be used as a source of proceeds to satisfy the judgment won by the Brown and Goldman families.

The Employee Retirement Security Act (“ERISA”) includes an asset protection fail-safe mechanism that ensures employees receive the benefits promised to them by their employers. See 29 U.S.C.A. § 206 (1974). This federal asset protection feature prevents creditors from satisfying judgments out of certain ERISA qualified retirement plans such as pensions, defined benefit plans, profit sharing plans, and 401(k) plans.

Plans falling outside of ERISA (e.g. IRAs, Roth IRAs, Life Insurance Cash Value, Annuities, etc.) are only protected to the extent provided by the state in which a judgment debtor resides, and to this end some states are much better than others. For example, Florida asset protection laws provide for 100% protection of IRA accounts, cash value of life insurance, and annuities. California, on the other hand, only provides protection to the extent reasonably necessary for support.

Florida Asset Protection

By 1999, Simpson had also availed himself of Florida’s strong homestead protection laws. Under Florida law at the time, any domiciled resident of Florida could take advantage of an unlimited homestead exemption. That simply meant Simpson’s home could not be touched by the Brown or Goldman families, though following the collapse of WorldCom (and the fact that many WorldCom execs had used their fraudulently obtained funds to build huge Florida mansions), the Florida legislature carved out some “securities fraud” exceptions to the homestead exemption.

Additionally, in 2005 Congress altered the application of state homestead exemptions within the context of bankruptcy proceedings. However, many states still offer very good protection against creditors outside of bankruptcy. Whether or not you qualify for that protection is a function of the state law where you are domiciled.

OJ Only Used Domestic Asset Protection

Not all asset protection strategies involve offshore trusts, but they do all require adequate planning. A qualified asset protection attorney can help you determine how best to prepare for an unknown future. And a failure to plan is one mistake that none of us can afford to make.

Click Here to Download a Guide on Protection of Retirement Plans.