Higgs v. Warrick: lessees of 99-year leases qualify for homestead and save our homes tax exemption purposes.

• Author: Baskies, Jeffrey A.
• Position: Florida

In a November 12, 2008, opinion, the Third District Court of Appeal affirmed a final summary judgment of the 16th Judicial Circuit Court for Monroe County. On June 4, 2009, the Florida Supreme Court declined to exercise jurisdiction notwithstanding certification of conflict by the Third District, ending the Monroe County property appraiser's fight to revalue the homestead of William L. Warrick as a result of the termination of his qualified personal residence trust (QPRT). (1) The ruling is very helpful to planners who work with clients who funded QPRTs and worry the clients may lose significant built-up tax benefits as a result of a change in owner upon the expiration of the QPRT term.

The 98-year Lease Technique

Many planners have advocated the use of a 98-year (or longer) lease as a way for grantors of QPRTs to retain homestead status and the F.S. [section] 193.155, Save Our Homes (SOH) benefits. (2) The argument that a 98-year lease preserves homestead ad valorem tax treatment is grounded in F.S. [section] 193.155(3), which states that property assessed under the SOH provisions shall be assessed to just value as of January 1 of the year following a change of ownership; however, a "change of ownership" is defined to exclude any transfer of legal title or beneficial title if "subsequent to the change or transfer, the same person is entitled to the homestead exemption as was previously entitled...."

The 98-year lease technique in conjunction with an expiring QPRT generally works as follows: The client enters into a 98-year lease prior to the expiration of the QPRT term and records that lease. (3) Based on the provisions of F.S. [section] 196.041, the grantor of the QPRT remains the beneficial owner of the homestead even after the term ends, and, thus, maintains the SOH benefits. For purposes of minimizing any gift or estate tax exposure on the QPRT, the lease is typically made effective the day before (or near in time) to the expiration of the QPRT term. To preserve homestead status for the residence titled in the QPRT, it is essential that the lease be effective prior to the QPRT term ending, so there is never a change of owner triggering SOH revaluation. (4)

Thus, as a result of the lease, the same person (the grantor) has the requisite beneficial interest in the property to qualify for homestead and SOH benefits after the QPRT term ends as had a right to them before the QPRT termination. While legal title might pass to the children (or trusts for them) when the QPRT term ends, beneficial ownership of the homestead remains the same by virtue of the lease. Therefore, the termination of the QPRT and transfer of legal title should not be a change of ownership for ad valorem tax purposes because the same person (the grantor) has the beneficial rights both before and after the date for which the term of years of the QPRT expires, as is required by F.S. [section] 193.155.

The decision in Warrick bolsters those arguments and supports the continued benefits of SOH by use of 98-year leases at the end of the QPRT term.

Facts of the Case

None of the facts of the case were in dispute. On April 27, 1995, Warrick created a QPRT and transferred his home on Sugarloaf Key in Monroe County to himself as trustee of the QPRT. For a retained term of 10 years, Warrick had the exclusive right to the rent-free use of the residence. During that retained term, Warrick claimed and was granted both a homestead exemption from ad valorem property taxes and SOH benefits. (5)

On April 27, 2005, Warrick's rentfree use of the home expired with the fixed term of the QPRT, and, pursuant to the terms of the trust agreement, his children became the beneficiaries of the trust.

Prior to the termination of the trust on April 27, 2005, however, Warrick individually entered into a lease with the QPRT. The lease provides for a 99-year term and provides for monthly rent (with certain revaluations to keep the rent at fair market value).

After the QPRT term ended, the property appraiser for Monroe County, Ervin A...