Florida Exemptions and How the Same May Be Lost.

• Author: Meyer, Robert C.

Asset protection is a bustling industry in Florida, and constitutionally protected under Fla. Const. art. I, [section]2. (1) Transferring assets into the Florida homestead or Ch. 222's statutorily protected assets is often done before and after creditor attack. Knowledge about how the Florida exemptions, combined with federal or bankruptcy statutes, which may trump the same, is important. This article reviews the basic exemptions provided under Florida and federal law, and then explores circumstances in which the exemption may become lost or affected.

Constitutional Exemptions

The Florida exemption scheme is layered: 1) constitutional; 2) statutory; 3) hybrid constitutional/statutory; and 4) common law. Constitutional exemptions hold more value and are more impervious to creditor attack. They are described in Fla. Const. art X, [section]4 (see Figure 1).

Statutory Exemptions

Statutory exemptions have grown by legislation. Figure 2 lists the most common statutory exemptions.

The Life Insurance Hybrid

Although life insurance is a statutory exemption, it uniquely holds a status nearly equal to the constitutional exemptions of Fla. Const. art. X, [section]4. One ruling reviewed the Fla. Const. art. X, [section]4, protection being derived from the 1885 revisions to the Florida Constitution. Prior to 1885, there was an 1868 Florida Constitution that provided:

[T]hat the proceeds of life insurance shall not be liable to any legal process in favor of any creditor of the insured unless the insurance policy declares that the policy was effected for the benefit of such creditor, was apparently not regarded as being violative of the exemption article of the Constitution of 1868, even though such proceeds exceed in amount the organic exemptions. (2)

In effect, life insurance has been interpreted to be an 1868 constitutional exemption, which is less protected than 1885 constitutional exemptions, but more protected than the statutory exemptions, most particularly those listed in F.S. Ch. 222. (3)

Common Law Exemptions

Florida offers the common law exemption of tenancy by the entireties.

Property held as a tenancy by the entireties possesses six characteristics: (1) unity of possession (joint ownership and control); (2) unity of interest (the interests in the account must be identical); (3) unity of title (the interests must have originated in the same instrument); (4) unity of time (the interests must have commenced simultaneously); (5) survivorship; and (6) unity of marriage (the parties must be married at the time the property became titled in their joint names). (4)

If property is held as tenants by the entireties, that property is exempt as to a creditor of one of the two tenants, but is not exempt as to a creditor of both tenants. (5)

Some Federally Created Exemptions

In addition to the Florida Constitution, Florida statutes and common law, there are federal exemptions. Figure 3 lists some of the most common federal exemptions.

Are State Statutory Exemptions (Other Than Life Insurance) Allowable?

Absent an enabling clause, a statute enacted by the state legislature may not restrict a fundamental right granted under the Florida Constitution. (6) The Florida Constitution occasionally uses enabling clauses--commonly created by the terms "appropriate legislation" in the constitutional provision. (7) Most importantly, the Florida Constitution does not include an enabling clause in Fla. Const. art. X, [section]4. Moreover, "[s]tate constitutions are limitations upon the power of state legislature[s]...." (8) As a result, "'To the extent a statute conflicts with express or clearly implied mandate[s] of the Constitution, the statute must fail.' Id. at 142. Not surprisingly, courts rely on this principle and conclude that legislative authority necessarily yields to constitutional pronouncements." (9) Because of such omission, the statutory exemptions that address "exemptions" specifically listed in FLA. CONST. art. X, [section]4, (10) may be ruled unconstitutional. The exemption provisions of F.S. Ch. 222, however, may be deemed "enabling legislation" because "[s]tatutes are presumed to be constitutional and courts must construe them in harmony with the constitution if it is reasonable to do so." (11) This issue has not been addressed by Florida courts.

Recharacterization

Sometimes, an asset may be one thing, but receive the exemption character from another. Examples include insurance proceeds paid on a loss of the homestead may be protected as homestead; (12) proceeds from sale of homestead that are held in an earmarked account may also be protected as homestead; wages in a bank account may continue to be exempt as wages for a period of months; and Social Security benefits deposited into a bank account may continue to be protected Social Security benefits. (13) Importantly, if these above-described funds are to inherit the exemption, the funds must not be commingled with other funds. (14)

Waiver

Creditor-drafted documents frequently provide for waiver of exemptions. As to constitutionally exempt assets, this practice is not well received by Florida courts. "[N]o policy of this [s]tate is more strongly expressed in the constitution, laws and decisions of this [s]tate than the policy of our exemption laws." (15) Florida homesteads are "sacred cows" that cannot have their exemption waived. (16) The Florida Supreme Court acknowledged there is permissible waiver of "other" constitutional rights, but limited a debtor's waiver of the homestead protection to secured debt (mortgages or mechanics liens). (17) Regardless of this, the Florida Legislature has allowed a spouse to waive his or her probate homestead rights, as well as other rights to the home, by written agreement. (18)

Waiver of statutory exemptions may, on the other hand, be permitted. The "head of household wages" statute specifically provides for the waiver of the exemptions and even provides a form for the same. (19) Other waivers are enforceable by caselaw: life insurance (20) or annuity. (21) Some benefits that may not be waived include workers' compensation benefits (22) or Longshore and Harbor Workers' compensation

claims. (23)

Overprotecting the Exemptions: How to Lose Homestead

If one is a resident in Florida, and one's real property is where the Floridian sleeps at night, the home would very likely be shielded from creditor attack by the homestead exemption. (24) But, there are three ways to lose the homestead protection.

Florida caselaw clearly establishes that limited liability companies cannot have a homestead protection under Fla. Const. art. X, [section]4. (25) Hard money lenders often do not wish to comply with various consumer protective acts that are tricky and time-consuming or paper-consuming. (26) To avoid consumer laws, lenders may demand that title be transferred to a limited liability company. In the end, the home lender has delivered cash to the homeowners at the expense of the homestead protection. If the shell company (the limited liability company that now has title) encounters a creditor in the future, the home may be sold. Alternatively, the limited liability company, as an asset of the residents, may be executable after judgment is reached against the members. (27)

Another event that may end homestead protection is when the homestead is sold. The proceeds of the sale may be protected. (28) However, inappropriate use of the proceeds may end the protective character of the same. Preservation of the exemption after the funds requires a bona fide intent to reinvest the sales proceeds into another homestead. (29) Additionally, the reinvestment must occur within a reasonable time. Lastly, the funds cannot be used for purposes other than reinvesting in a homestead. (30)

Homestead exemption may also be lost by abandonment of the residence. (31) Abandonment is a question of fact, ultimately focusing on the "intent" of the party. (32) Furthermore, the abandonment must be voluntary--a court order directing an estranged spouse to leave the home will not meet the requisite intent of abandonment to lose the homestead protections. (33)

F.S. [section]222, Fraudulent Transfer Provisions

Chapter 222, which creates most of Florida's statutory exemptions, has a few clauses that allow creditors to deprive debtors of exemptions. The first is F.S. [section]222.29, which reads: "An exemption from attachment, garnishment, or legal process provided by this chapter is not effective if it results from a fraudulent transfer or conveyance as provided in chapter 726."

The...