Authored by: Michael C. Levy, Esq.

Protecting an estate or trust’s assets from creditors often requires estate planning attorneys to advise clients to buy or own property in states with strong asset protection statutes.  The Florida Homestead Law provides, amongst other benefits, one of the strongest protections against the claims of creditors.  Generally, creditors cannot force the sale of homestead property to satisfy their outstanding claims.  However, a recent Tax Court decision indicated one major exception to this rule.

In Rubenstein v. Commissioner, the IRS sought to levy against the transferee of Florida homestead property to satisfy the claims against the transferor-debtor.  The transferee, the son of the debtor, had received the homestead property in 2003 at a time when his father owed the IRS over $100,000 in unpaid federal income tax.  The IRS subsequently filed a lien against the son for the father’s outstanding debt and subsequently determined that the son was liable for the value of the transferred property.  The son challenged the IRS on several grounds, most notably that the homestead property was exempt from claims of creditors and thus he should have no transferee liability.

In ruling against the son, the Tax Court acknowledged that, in general, homestead property is exempt from claims of creditors.  Several exceptions exist including for claims that arise in connection with the property (such as mortgages) and, as the Court held, federal agencies including the IRS.  Because the father’s transfer occurred while he had an outstanding debt to the IRS and insufficient means to pay off his debt, the transfer was considered a fraudulent conveyance, creating transferee liability to the son.  The son also argued that by providing care for his father during years of his deteriorating health, the transfer was made for reasonable consideration.  The Court similarly rejected this argument, holding that although the son’s service to his father was ‘commendable’, it did not rise to the level of reasonable consideration for his father’s transfer of the property.

Asset protection planning requires careful consideration of not only a specific jurisdiction’s law, but also the facts and circumstances that are behind the planning.  As the decision in Rubenstein shows, failure to properly consider the facts or the law can lead to loss of the assets and potential liability for the transferees.