The chameleon is too big (and cannot be subdivided).
Interestingly, the issue has not been clearly addressed by the Florida courts, and the cases that seem to suggest an answer are, as will be shown below, largely irrelevant to the analysis and, worse, if woodenly applied, would produce a result that is arguably both contrary to Florida homestead law and inequitable.
Residence Anchors the Analysis
In order to frame the issue properly, it is best to start with what is clear. If the homestead exceeds the constitutional size restriction and it can be subdivided, then Florida law provides that the recipient of the protected homestead is entitled to the residence plus the size-restricted portion of land that is contiguous to the residence. In Fort v. Rigdon, 100 Fla. 398 (Fla. 1930), the land in question was outside a municipality
and comprised one contiguous body of 560 acres, thereby exceeding the constitution's 160-acre size limitation. The petitioners sought to have the trial court declare the most valuable portion of the property to be homestead, rather than the portion on which the residence was located. The appointed magistrate refused and, instead, designated 80 acres on which the residence was located and an additional contiguous 80 acres. The Supreme Court affirmed, citing Oliver v. Snowden, 18 Fla. 823 (Fla. 1882), which held that "the extent of homestead is measured by quantity and not value." "Quantity" is then measured by the location of the residence. Rigdon, therefore, stands for the proposition that residence anchors the analysis as to what portion of land is considered homestead when the land exceeds the constitutional size restrictions.
This being the case, this author can see no reason why the result in Rigdon should change depending on whether the lot can be subdivided. The issue can best be described using the diagrams below.
In Diagram 1, per Rigdon, the result is clear. The recipient of the protected homestead receives the residence and the size-restricted portion of the property with the estate receiving the "nonprotected" portion. However, in Diagram 2, because of the location of the residence, the lot cannot be subdivided.
Overcoming Obstacles: In Re Kellogg and In Re: Quraeshi
Two cases seem to imply that when a lot cannot be subdivided, the court should simply allocate to the recipient of the protected homestead that portion that represents the proportionate amount of the protected homestead (proportionate methodology). For example, if a lot within a municipality is one and a half acres, then the recipient would only receive one-third of the sales proceeds. On closer analysis, however, neither case speaks to the issue presented.
In Re Quraeshi, 289 B.R. 240 (Bankr. S.D. Fla. 2002), was a debtor-creditor dispute and did not involve a beneficiary's right to protected homestead under art. X. In Quraeshi, the proceeds of the sale were divided 19 percent to the debtor and the balance to the trustee. It was done that way because the parties agreed to do so. The case contains no discussion as to how the proceeds of the sale should be divided absent an agreement.
In In Re Kellogg, 197 F.3d 1116 (11th Cir. 1999), another debtor-creditor case, the court did not discuss how the proceeds were divided. The opinion only recites the history of the case, in which the debtor initially claimed exemption of the entire proceeds, but when new counsel appeared for the debtor, an amended bankruptcy schedule was filed, claiming an amount that was 81 percent of the amount of the proceeds as being exempt from creditors. The opinion never discloses the exempt amount ultimately determined or how the determination was made.
Toward a Resolution
* Problems with the Proportionate Methodology--The proportionate methodology is in fact deeply flawed. Consider a situation in which a house sits on a one-and-a-half-acre parcel of property within a municipality. The land is valued at $8 million, and the house is valued at $2 million. If the land could be subdivided, per Rigdon, the recipient would receive the protected homestead, valued at approximately $4.67 million ($2 million (residence) + (1/3 x $8 million) (land)). Conversely, if the land could not be subdivided and the recipient only received a proportionate amount, the recipient would receive only $3.33 million or 29 percent less.
The flaw in the proportionate methodology is that it violates the Rigdon principle of "residence anchors the analysis." It disregards the value of the residence and, instead, lumps the value of the land and the residence together. Residence does not anchor the analysis.
Perhaps more troubling, however, is the fact that every foot added to the land decreases the value of the protected homestead. For example, using the same values above, the following results obtain as the land increases:
Size Value of Protected (Acres) Homestead 1.5 $3,300,000 2 $2,400,000 2.5 $2,000,000 3 $1,670,000
Now, one may argue that this decreasing value of the homestead, standing alone, is not persuasive. Recall that in Rigdon, it was not the most valuable portion of the land that the court held was the protected homestead, but the portion on which the residence was located. As the court held, homestead is measured by quantity, not value. (4) However, the decreasing value of the homestead cuts against a significant aspect of Florida's homestead law that strongly favors protecting the surviving spouse and family. (5) Moreover, the exemption is not purely personal. The Florida Supreme Court has held that the purpose of the homestead exemption is to promote stability and welfare of the state by securing to the householder a home. (6)
* Resolution: Value the Home and Property Separately--In light of the above problems in applying the proportionate methodology, is there a way to guarantee the same result in valuing the protected homestead regardless of whether the lot can be subdivided? The answer is yes, so long as the principle of Rigdon is followed, with the residence anchoring the analysis. The way forward is simply to value the residence and the land separately, with the recipient of the protected homestead receiving the value of the residence and the value of the size-restricted portion of land contiguous to the residence.
The solution is as elegant as it is simple. It provides for consistency between the various examples. It is, moreover, legally sound and equitable. At no point will the value of the protected homestead change, regardless of the parcel's size. The certainty this methodology affords likely has implications beyond simply what is part of the probate estate. However, two examples that immediately come to mind are the elective share computation and the effect of homestead status on intestacy.
* Homestead and the Elective Share--The elective share regime provides that the decedent's probate estate is part of the elective estate. (7) Accordingly, this would include nonprotected homestead. The elective share regime also provides that the elective share is in addition to homestead. (8) Based on these provisions, it would appear that a surviving spouse is entitled to the protected homestead, outside the computation of the probate estate, as well as the elective share portion of the nonprotected homestead. As such, it is crucial to determine what is nonprotected homestead. In light of the above analysis regarding the varying results between the proportionate methodology and the "residence anchors the analysis" methodology, the amount of money a surviving spouse receives can change dramatically. Applying the proportionate methodology, the obtains the results in Diagram 3. Conversely, if the "residence anchors the analysis" methodology is employed, the value never changes because the value of the protected homestead remains stable throughout, as illustrated in Diagram 4.
Based on the above, in most situations it is highly advantageous to the surviving spouse to have as much of the property considered "protected homestead." Usually, the proportionate methodology will provide the surviving spouse with a higher elective share. In situations like Rigdon, however, the spouse would likely receive less because the nonprotected homestead was actually worth more than the protected homestead.
* Homestead and the Intestate Estate--The "residence anchors the analysis" methodology will have an important twist in some intestate situations because it may yield less to the surviving spouse than the proportionate methodology. Consider the following scenario: The decedent died owning the homestead property described above. He died intestate, was married at the time of his death, and the couple had children during their marriage.
In an intestate estate, protected homestead passes as provided in [section]732.401. The spouse receives the entire protected homestead if there are no descendants of the decedent. If there are descendants of the decedent, the spouse receives a life estate in the protected homestead, with the remainder going to the decedent's descendants. The spouse can elect to take a one-half interest in the protected homestead as a tenant-in-common with the other one-half vesting in the decedent's descendants.
Nonprotected homestead passes as provided in [section][section]732.102 and 732.103. The spouse receives the entire intestate estate if there are no descendants of the decedent, and the spouse has no other descendants, or if all of the decedent's descendants are also descendants of the surviving spouse, and the surviving spouse had no other descendants. If the decedent had children with someone other than the surviving spouse, or the spouse had children with someone other than the decedent, the spouse only receives one-half of the decedent's estate.
In the above hypothetical, apportioning the value between the protected and nonprotected homestead is crucial. The protected homestead portion will pass to the spouse as a life estate or he or she can elect to take a one-half value as tenant-in-common with the decedent's descendants. However, the entire portion of the nonprotected homestead will pass to the spouse. Here, importantly, if the spouse elects to take a one-half interest in the protected homestead, the surviving spouse could receive more than $600,000 more under the proportionate methodology than if the "residence anchors the analysis" approach were employed. (9) Because the spouse receives 50 percent of the nonprotected homestead in an intestate estate, the impact is greater than cases involving the elective share, which is 30 percent of the elective estate.
There will be other issues associated with the types of homestead addressed in this article. For example, if the lot cannot be subdivided, but the value must be allocated between protected and nonprotected homestead, how would a court go about partitioning the property in order to monetize the nonprotected homestead? Current partition law does not provide a mechanism to do this. Are there any conflict of interests involved depending upon who is serving as the fiduciary and which methodology is advocated? These issues, however, apply whenever a homestead exceeds the constitutional size restriction and yet cannot be subdivided. The purpose of this article is to simply propose a consistent methodology to determine the value of the protected and nonprotected portions. As with all things homestead, nothing is ever easy or straightforward, which is why it is and remains our legal chameleon.
(1) The Florida Constitution provides protection of up to one-half acres within a municipality and up to 160 acres outside a municipality.
(2) Fla. Stat. [section][section]733.607. 733.608(1) (2015); Cavanaugh v. Cavanaugh, 542 So. 2d 1345 (Fla. 1st DCA 1989) ("Neither executors nor administrators have at any time in this [s]tate had any jurisdiction over the homestead of a deceased person. The homestead is in no wise an asset of the estate of a decedent.").
(3) Mckean v. Warburton, 919 So. 2d 341 (Fla. 2005) (protected homestead not available for payment of cash devises); Snyder v. Davis, 699 So. 2d 999 (Fla. 1997) (protected homestead not available for payment of administrative expenses).
(4) Rigdon, 100 Fla. at 402.
(5) See Snyder v. Davis, 699 So. 2d 999, 1002 (Fla. 1997) (homestead law is to be liberally construed in favor of maintaining the homestead property); Butterworth v. Caggiano, 605 So. 2d 56, 60 (Fla. 1992) (The purpose of the homestead exemption has been described broadly as being protection of the family, and to provide for a refuge from misfortune, without any requirement that the misfortune arise from a financial debt.).
(6) Chames v. DeMayo, 972 So. 2d 850 (Fla. 2007) ("We have repeatedly recognized that the homestead exemption protects not only the debtor, but also the debtor's family and the [s]tate.") (emphasis added); Public Health v. Lopez, 531 So. 2d 946, 948 (Fla. 1988).
(7) Fla. Stat. [section]732.2035(1)(2015).
(8) Fla. Stat. [section]732.2105(2015).
(9) The proportionate methodology would yield the surviving spouse $8,350,000. She would receive one-half of the protected homestead (1/2 x $3,300,000 = $1,650,000) and the entire portion of the nonprotected homestead ($6,700,000). The "residence anchors the analysis" methodology would yield the surviving spouse only $7,705,000. She would again receive one-half of the protected homestead (1/2 x $4,670,000 = $2,335,000) and the entire portion of the nonprotected homestead ($5,370,000). The analysis of the above changes significantly if there were children of the decedent who were not descendants of the spouse. In that situation, it would not matter which methodology was employed because the spouse would receive one-half of both the protected and nonprotected homestead.
Thornton B. Henry is an associate with The Karp Law Firm in Palm Beach Gardens. He focuses his practice on probate litigation, estate planning, and probate and trust administration. He thanks Rohan Kelley for his help in formulating the crux of this article; Jeff Baskies and Randy Randolph for their helpful comments and willingness to review drafts; and Lauren Johnson for her editorial support.
This column is submitted on behalf of the Real Property, Probate and Trust Law Section, Michael J. Gelfand, chair, and Jeff Goethe and Doug Christy, editors.
Caption: Diagram 1
Caption: Diagram 2
Diagram 3 Value of Value of Elective Share Total to Size Protected Nonprotected of Nonprotected Surviving (Acres) Homestead Homestead Homestead Spouse 1.5 $3,300,000 $6,700,000 $2,010,000 $5,310,000 2 $2,400,000 $7,600,000 $2,280,000 $4,680,000 2.5 $2,000,000 $8,000,000 $2,400,000 $4,400,000 3 $1,670,000 $8,330,000 $2,499,000 $4,169,000 Diagram 4 Value of Value of Elective Share Total to Size Protected Nonprotected of Nonprotected Surviving (Acres) Homestead Homestead Homestead Spouse 1.5 $4,670,000 $5,330,000 $1,599,000 $6,269,000 2 $4,670,000 $5,330,000 $1,599,000 $6,269,000 2.5 $4,670,000 $5,330,000 $1,599,000 $6,269,000 3 $4,670,000 $8,330,000 $1,599,000 $6,269,000
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|Author:||Henry, Thornton B.|
|Publication:||Florida Bar Journal|
|Date:||Mar 1, 2016|
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