Florida Real Property Ownership, Part Two

In last month’s article, I discussed the various ways individuals can hold title to real property in Florida.  These were as tenants in common, joint tenants with full rights of survivorship and as tenants by the entireties.  These estates are the most common but in many cases, they are not the best approach for owners of investment property, rental properties, second homes (in or outside the state of Florida) and foreigners.  In these cases a different approach to ownership should be considered.  Because of the tax and estate issues involved in this discussion, you should always seek professional legal and tax help before choosing how to hold title to these type properties, as no one method is best.

           The most common method for ownership is the use of a trust.  The benefit of trust ownership is that it allows for a transfer of the property outside the estate of the individual owner.  For example, If a husband and wife have a home in New York and by a vacation home in Florida in Boca Raton, when the first spouse dies, the property passes, by operation of law, to the surviving spouse (simply record a death certificate and an affidavit of continuous marriage to clear title).  However, when the second spouse dies, an ancillary administration of the surviving spouse New York estate must be completed in order to clear title.  This is often a surprise to the surviving children, and can delay sale of the property in Florida for months.

           By creating a trust to hold title to the property, this ancillary administration is avoided.  The most common trust is a Revocable Living Trust.  This type of trust allows the settlors to retain the power to cancel the trust or take trust action without permission of the beneficiaries (or the trustee(s) if different than the settlors themselves.  In the scenario above, the husband and wife create a trust naming themselves as the Co-Trustees, and their preferred heirs as the beneficiaries. 

           They also provide a provision that upon the first spouse’s death, the second spouse remains the sole trustee and then upon the last spouse’s death, a successor trustee is appointed (either a friend, relative, attorney or one of the beneficiaries) who then has the powers provided for in the trust.  These powers can be as broad as the original trustees or can be specifically limited, such as requiring the property be deeded to a specific person or charity.  However, no probate of the last spouse’s estate is needed.  To clear title only the recording of a death certificate and a trust certificate with relevant portions of the trust attached is necessary.

           Generally speaking, Revocable Trusts do not infer any tax benefit and provide no creditor rights protection to the settlors.  The property in the trust is deemed the settlors property for tax and creditor claims.  This is because the settlors retain control over the property through the revocable nature of the trust.  Therefore a Revocable Trust is not a good vehicle to protect owners of multiple properties where the risk of tenant lawsuits could result in substantial damage claims.

           Revocable Trusts do provide the ability to protect the trust from the claims of the creditors of the beneficiaries of the trust.  By including a spendthrift clause in the trust, the funds and assets held by the trust that would go to a beneficiary cannot be reached as long as the funds either remain in the trust and the distribution of assets is discretionary to the trustee (and not mandatory). With proper drafting, the funds can be used to benefit the credit risky beneficiary without letting creditor’s reach those funds.

          

           Trust usage does have its drawbacks.  It is an immediate expense to create a trust that may never be used to avoid probate.  It breaks the special creditor’s right protection afforded property owned by husband and wives in Florida.  It does not offer any creditor or tax protection.  Many people create a trust and fail to put all their assets in the trust, which then requires some level of probate.  However, in many cases a trust makes sense, especially if done as part of a comprehensive estate plan.

Michael J Posner, Esq., is a partner in Ward, Damon, Posner, Pheterson & Bleau, P.L., a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  They specialize in real estate trust matters and can assist in advising on and creating trusts.  Mr. Posner can be reached at 561.594.1452, or at mjposner@warddamon.com

Florida Real Property Ownership - Part One

Owning Real Property in Florida may appear simple but in fact it can be a mind field for those in particular situations, such as married couples, older single out of state owners, Canadians (and other foreigners), owners of multiple investment properties, and unmarried couples.  Without proper planning, a wrong decision can lead to unnecessary probates, judgments, tax withholding and other undesired consequences.  The following is a basic primer on estate holding, but it should only be a starting point, and all readers are encouraged to discuss the best method for property ownership with their legal and tax professional.

            The Three Estates:  In Florida, the law recognizes three distinct estates for multiple owners of property.  Two are derived from common law, and the third, tenants by the entireties (TBTE) is distinct to Florida and about half of the states in the US.  The traditional estates are Tenants in Common and Joint Tenants.

            Ownership as Tenants in Common (TIC) means that each owner owns a distinct percentage as stated in the deed.  If not stated, then it is presumed to be equal shares, two owners means each owns fifty percent, four owners means each owns twenty-five percent.  TIC owners can freely convey their interest without affecting the nature of the estate, and upon the owner’s death, their TIC interest passes to their heirs at law.  Creditors can encumber a TIC interest, either voluntarily through a mortgage, or involuntarily through a judgment.  To create a TIC interest in Florida the deed need merely recite the grantee (buyer’s) names, and no statement of interest is required.  For example, John Smith and Dave Brown, grantees, creates a TIC estate.

            Ownership as Joint Tenants traditionally meant that the owners share equally in the ownership of the entire property.  To create a joint tenancy, four specific elements are necessary.  The joint tenants must own an undivided interest in the property as a whole and their share must be equal (TIC owners can have variable ownership). (2) The estates of the joint tenants are vested must be for the same period of time. (3) The joint tenants hold their property under the same title. (4) The joint tenants all enjoy the same rights of possession.  Traditionally, merely stating John Smith and Dave Brown, joint tenants, as grantees, created the Joint Tenant estate.  However, Florida courts have long rejected that rule, requiring magic additional language to create the estate.

            The magic language is “with rights of survivorship” added to the joint tenant language.  John Smith and Dave Brown, joint tenants with rights of survivorship would create the necessary estate.  The main benefit of the joint tenancy is that upon the death of one tenant, the property passes outside of the deceased owner’s estate to the other owner and no probate is required.  Joint Tenancy does not act as a creditors protection scheme and creditors can lien and foreclose a joint owner’s interest.  Joint Tenancy is usually the best option for owners with a common interest through family or for same sex couples.  After death, the recording of death certificate and a non-tax (estate) certificate will generally clear title in the surviving joint tenant.

            The final estate in Florida is Tenancy by the Entireties (TBTE).  This estate must be created with the same conditions as a joint tenancy, but is only available to married couples.  The magic language can be John Smith and Mary Smith, husband and wife, or John Smith and Mary Smith, his wife, Mary Smith and John Smith, her husband, or even John Smith and Mary Smith, as tenants by the entireties.  The TBTE estate has the same survivorship interest as the joint tenant estate but also adds a creditor’s protection that only applies to married couples holding title as TBTE.  For example, a couple owns three rental homes in Florida in addition to their homestead.  If one spouse is sued and a judgment is entered against that spouse, the judgment will not attach or become a lien against the property.  Thereafter, as long as they remain married or the non-judgment spouse survives the judgment spouse, the lien will not attach against the property.  However, if the parties get divorced, or the judgment spouse survives the non-judgment spouse, the lien can attach.

            We frequently see mistakes in planning with TICs created when the new owners, had they known would have either selected a joint tenancy or even a TBTE estate.  Knowing your options and planning when purchasing can avoid these problems.

Michael Posner, Esq., is a partner in Ward Damon a mid-sized real estate and business oriented law firm serving all of South Florida, with offices in Palm Beach County.  They specialize in real estate and can assist sellers and buyers in all real estate matters.  They can be reached at 561.594.1452, or at mjposner@warddamon.com