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.