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IMPORTANT INFORMATION LINK: |
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Frequently Asked Questions... WHAT IS A LIVING TRUST? WHAT CAN A LIVING TRUST DO FOR ME? SHOULD EVERYONE HAVE A LIVING TRUST? HOW DOES A LIVING TRUST HELP AT MY DEATH? WHO SHOULD BE THE TRUSTEE OF YOUR LIVING TRUST? WHAT ARE THE DISADVANTAGES OF A LIVING TRUST? IF I HAVE A LIVING TRUST, DO I STILL NEED A WILL? DOES A LIVING TRUST SAVE ESTATE TAXES? DOES A LIVING TRUST PAY INCOME TAXES? WHAT ARE THE ADVANTAGES OF HAVING A LIVING TRUST?
ARE THERE OTHER ALTERNATIVES TO A LIVING TRUST?
ARE THERE OTHER ATTRIBUTES OF A LIVING TRUST?
WHAT ARE THE DISADVANTAGES OF A LIVING TRUST? WHAT OTHER “PROTECTION” DOCUMENTS SHOULD I HAVE? What is a durable power of attorney? When should I use a power of attorney? How much power does a power of attorney have? How do I create a power of attorney? What happens if I don't have a durable power of attorney for finances? When does a power of attorney end? WHAT IS A DURABLE POWER OF ATTORNEY FOR HEALTH CARE? IS AN ADVANCE HEALTH CARE DIRECTIVE DIFFERENT FROM A DURABLE POWER OF ATTORNEY FOR HEALTH CARE? WHAT IS AN ADVANCE HEALTH CARE DIRECTIVE? IS AN ADVANCE HEALTH CARE DIRECTIVE DIFFERENT FROM A “LIVING WILL”? WHO MAY I APPOINT AS MY HEALTH CARE AGENT? HOW MUCH AUTHORITY WILL MY HEALTH CARE AGENT HAVE? CAN I CHANGE MY ADVANCE HEALTH CARE DIRECTIVE? HOW LONG IS AN ADVANCE HEALTH CARE DIRECTIVE VALID? WHO CAN COMPLETE AN ADVANCE HEALTH CARE DIRECTIVE? CAN I BE FORCED OR REQUIRED TO SIGN AN ADVANCED HEALTH CARE DIRECTIVE? DO I NEED A LAWYER TO COMPLETE AN ADVANCE HEALTH CARE DIRECTIVE? WHAT IS A DECLARATION OF HOMESTEAD? ADDITIONAL OBSERVATIONS ABOUT THE HOMESTEAD LAWS DISCLAIMER - TERMS CONDITIONS AND SECURITY A trust is a written, legal agreement between the individual creating the trust and the person or institution (the trustee) named to manage the assets held in the trust. In many cases, it is appropriate for the person creating the living trust (commonly known as a trustor, grantor or settlor) to be the initial trustee until management assistance of the trust is anticipated or required. The “Trust Masters Home Protection Agreement” is a revocable living trust. It is sometimes referred to as a revocable inter vivos trust or a grantor trust. A revocable living trust may be amended or revoked by the person creating it, at any time during the trustor’s lifetime, as long as the trustor is competent. WHAT CAN A LIVING TRUST DO FOR ME? A living trust can provide for the private management of your assets, if you choose not to act as trustee, or when you are unable to do so, by the person or persons who you appoint as trustee. If you are incapacitated, your trustee can assume responsibility for your assets in an accountable fashion, and manage them for your benefit without direct court intervention or supervision. At your death, the trustee acts much as an executor would by gathering your assets; paying valid debts, claims and taxes; and by distributing the assets in your living trust, as you have directed. SHOULD EVERYONE HAVE A LIVING TRUST? Not necessarily. But if you own a home, regardless of its value, you should seriously consider having one. The savings in probate costs alone makes having a trust worthwhile. See the Probate Cost Summary for a general assessment of costs associated with a typical home in California. In addition, the preparation of an Advanced Health Care Directive (also known as the Healthcare Power of Attorney) as a part of the living trust is invaluable and everyone over the age of eighteen (18) years old or who is emancipated should have one. HOW DOES A LIVING TRUST HELP AT MY DEATH? Assets held in your living trust at your death can be managed by the trustee of your living trust and distributed in accordance with your directions in the trust. The trustee is also accountable to your beneficiaries for the trust assets held for their benefit after your death. The trust is not under the direct management of the probate court at and after your death and, therefore, the value and the nature of your assets and the identities of your beneficiaries do not become public record. At your death, however, notice must be given to all of your heirs and to all beneficiaries of your living trust, advising them, among other things, of their right to obtain a copy of the living trust. If your assets were in your name alone at your death, or if you died with a Will, then they would be subject to probate. Probate is the court-supervised process developed, under law, which has as its goal the transfer of your assets at your death. WHO SHOULD BE THE TRUSTEE OF YOUR LIVING TRUST? As noted, many people act as their own trustee until their incapacity or death. Others determine that they need financial assistance and management of their assets simply because they are too busy or too inexperienced or simply don’t wish to have the responsibility of day-to-day management of their financial affairs. Perhaps the most important decision for you to consider is your choice of a trustee to act in your place. As stated, your trustee will have considerable authority and responsibility, is not under direct court supervision, and will assume that responsibility either during your lifetime (if you so choose), if you become incapacitated, or at your death. A trustee may be a spouse, adult children, other relatives, family friends, business associates or a professional fiduciary. The professional fiduciary may be a bank or trust company which must be licensed by the state. You may also provide for co-trustees. You may choose to discuss this choice with an estate planning lawyer. IF I HAVE A LIVING TRUST, DO I STILL NEED A WILL? Yes. Your will affects any assets which, for one reason or another, were held in your name alone at your death and not in your living trust or in some other form of ownership. Your will may also nominate the guardians of the person and estate of your minor children, to care and provide for them. DOES A LIVING TRUST SAVE ESTATE TAXES? Yes. A living trust may contain provisions which can postpone, reduce or even eliminate estate taxes. This will depend on a number of factors and you should check with your tax adviser for clarification. DOES A LIVING TRUST PAY INCOME TAXES? Not during your lifetime.
For so long as you are either the trustee or a co-trustee, no income tax returns
are required to be filed for your living trust. The taxpayer
identification number for the trust is your Social Security number, and all
income and deductions related to the assets held in the trust are reportable on
your individual income tax returns. Again, this will depend on a number of
factors and you should check with your tax adviser for clarification. More and more individuals are putting their assets into revocable living trusts which are completely flexible and broadly adaptable arrangements for management, protection and distribution of a family's assets. A living trust is created during your lifetime and is funded with most or all of your assets by simply re-titling the assets to yourself as trustee. A living trust is "LIVING" in that it takes effect immediately. You continue to enjoy all the present benefits of your assets without any changes in your ability to control them. A living trust is revocable during your lifetime, which means that its terms are changeable and assets in the trust can be re-transferred to your name if desired, without adverse tax consequences. A living trust is a private agreement where the distribution of assets under the terms of the trust is not subject to the publicity given to wills in probate proceedings. The complete flexibility of a revocable living trust means that one can be drafted to suit your individual needs and family situation. When you create a living trust you can act as your own trustee so there are no management fees or loss of control. You can change or modify the trust terms at any time, change beneficiaries, add or delete assets held by the trust without tax consequences. A revocable living trust does not complicate the management of your assets. While protecting your property within a living trust you can do whatever you can do now with your assets and property. You can buy, sell, borrow, make gifts, etc. With a living trust you retain control over all your property and assets during your lifetime and you determine distribution of your estate after your death. Since a living trust is revocable, it has no income tax consequences during your lifetime; no separate tax return is even filed and all trust income is reported under your social security number. With a Living Trust, you are also appointing someone else (a professional, a trusted friend, or a family member) to manage the assets in your trust for your benefit in the event of your incapacity (e.g., Alzheimer's, a stroke, an accident, etc.); because the assets are in a trust, no court administered conservatorship will be required. Under a living trust, you have the successor trustee of your choice ready to step in and take over your affairs until you recover or for the remainder of your lifetime.
WHAT ARE THE DISADVANTAGES OF A LIVING TRUST? Because living trusts are not under direct court supervision, a trustee who does not act in your best interests or in a prudent fashion accountable to you or your beneficiaries may, in some cases, be able to take advantage of the situation to a greater extent than would be possible had the trustee been under direct court supervision, which provides such safeguards as court accountings and, in some situations, a bond.
OTHER ATTRIBUTES OF THE LIVING TRUST
One of the primary advantages of a living trust is that it allows for the transfer of property upon the death of the trustor(s) (persons who create the trust) without going through probate. Instead, the trust document itself provides for what is to happen upon death. Unlike a Will, which must be approved by a court before it has legal force and effect, a living trust is like any other contract agreement and needs no court approval or processing. If for some reason it becomes important to have court supervision over the distribution of property from a living trust, it is possible to bring a proceeding for that purpose. Normally you would transfer title to all your assets to the trust. This might involve pink slips and other such transfer documents. There may, however, be situations where you want to keep certain assets out of the trust. If you have a question about this, we suggest you discuss it with an attorney. In most cases, there would be no transfer fees or only minimal fees since this is not a sale but only a change in form of ownership. There are specific steps that you must take to make the transfer effective. If you do not take these steps, your living trust will be useless.
ALTERNATIVES TO THE LIVING TRUST Many individuals elect to leave their property to their heirs by way of a “will.” Although this may be an acceptable alternative, if your estate assets do not total more than $100,000, or if you DO NOT own real estate, please keep in mind that a will must be probated and in order to pass title of your property to your heirs, it will require a court order. Consequently, the cost of probate, as discussed more thoroughly elsewhere in this website, may be considerable, which may indicate the advisability of using a trust, rather than a will. A considerable number of individuals hold title to their real property in “joint tenancy with right of survivorship.” This is usually done between a husband and wife. Holding title to real estate in this manner will assure that upon the death of the first joint tenant, title will pass to the surviving joint tenant, which process can be perfected with a minimum of effort and cost. However, problems start to arise when the surviving joint tenant wants to then pass title to his or her heirs, usually the children. It is not always advisable to hold title in joint tenancy (with right of survivorship) with your children, or anyone you may want to pass title after your death, for several reasons: 1. If you add your child(ren) as joint tenants on your title, and, for example, your child is married, you could find yourself embroiled in litigation if your child’s spouse decides to get a divorce and seeks a “community property” interest in your home during the divorce proceedings. You could conceivably end up with your son or daughter’s spouse as a part owner of your home. That is not a very pleasant thought for many parents. 2. A second common reason for avoiding holding title to your property in “joint tenancy with right of survivorship” (unless, of course, the joint tenant is your spouse) is if the joint tenant experiences financial problems. Often, children who are “joint tenants” with their parents may find themselves in financial trouble, in which event their creditors may look to the child’s interest in your home to satisfy the creditor’s claim or judgment. Being forced to sell your property because of the debts of your joint tenant is, again, not a very pleasant thought. Of course, there are numerous other situations wherein “joint tenancy with right of survivorship” would not be in your best interests and where a revocable trust would serve you far better. Following are other issues that are related to your estate planning needs. There are situations in which the formation of a partnership or a corporation would be advisable. If you have questions about this area, you should obtain legal and tax advice. One technique for the transfer of assets is through bank accounts. You can put your funds in a joint account with another person and upon your death, that person will have the right to the funds in that account. This is a specialized form of joint ownership. For tax purposes, all those funds will be regarded as included in your estate, however. Another method of using a bank account to transfer assets is to establish an account for the benefit of another person. In the law these are known as Totten Trusts. For example, an account "Mary Smith for the benefit of "Nancy Jones" can be managed by Mary during her lifetime and the funds would go to Nancy upon Mary's death. Again, these funds will be included in Mary's estate for estate tax purposes. Life insurance policy proceeds are not subject to probate except where you name your own estate as the beneficiary. The purchase of a policy of life insurance, therefore, can allow for the transfer of substantial amounts of money without the need to pass it through probate. These funds are usually available fairly quickly in contrast to property in probate. Life insurance proceeds will usually be included in determining the size of your estate for estate tax purposes. For example, if you own a life policy that pays a $500,000 benefit, that will be added to your gross taxable estate. Therefore, if you have other assets worth $150,000, your estate would be subject to estate taxes. If however, you neither own the policy nor have any means of exercising control over it, the policy will not be included in your taxable estate. For this reason, some people purchase a life insurance policy on their life, transfer ownership over it to another person, and then make annual gifts of the amount of the premiums on the policy. This will effectively transfer substantial assets upon death without either probate or estate taxes. There are a wide variety of forms of life insurance on the market today and you may want to investigate your options as a part of an overall financial plan. Additionally, life insurance policies may provide for current income to you now if you are disabled with AIDS. There are a number of companies that will in effect buy out the policy's benefits to provide you with cash now. Most insurance companies will do this as well. Especially where you face life-threatening circumstances, a gift to people you would want to have a particular item or a certain amount of money after your death may be appropriate before you die. Property transferred by gift avoids probate. A gift does not, however, remove the transferred asset from your estate for tax purposes. Remember to do anything needed to complete the gift. This may mean formally transferring title by deed, pink slip or other means. At the very least, it means relinquishing control over the item to the person you are giving it to. Where no document of title is needed, write out a letter indicating the specific things being given and have it notarized if possible. Note that there may be tax consequences connected with gifts. Gifts in excess of $11,000 per person per year require a federal gift tax return. Gifts during your lifetime in excess of $11,000 per person per year are accumulated for purposes of determining the $1.2 million threshold for estate tax purposes. This can be, however a viable means of distributing one's estate and avoid probate. When combined with insurance policies, it can provide for a very large tax-free gift. For example, if you purchase a policy of insurance on your life, the value of it is normally included in your taxable estate, whether you pass the proceeds through your Will or not. However, if you transfer ownership of the policy to another person, and retain no ability to change beneficiaries or otherwise control the policy, it will not be part of your taxable estate. You can then make a gift each year of the amount of the premiums to the person to whom you gave the ownership of the insurance policy. Then, upon your death, that person or the beneficiary of the policy will get the value of the policy tax-free. See an insurance specialist, attorney or financial planner for more information about how this can work for you. Issues Regarding the Revocable Trust A Living Trust does not have to go through the court probate process. Assets can be distributed immediately and you can determine what, if anything, the person administering your estate should be paid for their services in your trust. There are some disadvantages to living trusts. Since they are not supervised by the court, there is no guarantee that your estate will be properly handled. There is, however, a procedure for beneficiaries to bring the process before the court should the need arise. Additionally, the creditor protection available through probate is not available with trusts. Your successor trustee must make certain that all your proper debts are paid before distribution or creditors retain the right to collect from persons who inherit from you after distribution. Basically, if you have a person who you can trust to follow your wishes, who is capable of handling the required transactions and who has the time and patience to take care of these matters, you may wish to consider using a living trust. WHAT OTHER “PROTECTION” DOCUMENTS SHOULD I HAVE? A Durable Power of Attorney for Property Management deals with assets which have not been transferred to your living trust prior to your incapacity or which you may receive after your incapacity. In such a power, you appoint another individual (attorney-in-fact) to make property management decisions on your behalf. This document, however, cannot replace the living trust, inasmuch as, among other things, it cannot dispose of your assets in accordance with your wishes at your death. A power of attorney is a document authorizing someone to act on your behalf. You determine how much power the person will have over your affairs. Your power of attorney may be a general or limited power of attorney. A general power of attorney authorizes your agent to conduct your entire business and affairs. A limited or special power of attorney authorizes your agent to conduct specified business, perform specified acts, or make certain decisions on your behalf. In any power of attorney, you are considered to be the principal and the person to whom you assign the power is your agent or attorney-in-fact. Your attorney-in-fact does not have to be a lawyer, but it should be someone you trust a great deal. What is a durable power of attorney? When a power of attorney is considered durable, it remains valid even if you become incompetent or incapacitated. An ordinary power of attorney expires if a person becomes unable to make his or her own decisions. Durable powers of attorney can be prepared either to take effect immediately or to go into effect only if and when you become unable to make decisions for yourself (a springing durable power of attorney). The power of attorney form should indicate what kind of power of attorney you want. You may want to consult an attorney regarding the type of power of attorney you want. When should I use a power of attorney? You may want to use a power of attorney if you are unable or unwilling to handle your financial affairs yourself. You may also use a power of attorney to allow another individual to take care of your responsibilities at the time you become incapacitated. Having a power of attorney does not restrict you from doing these things on your own, but instead shares these responsibilities with someone else. How much power does a power of attorney have? You may give your attorney-in-fact as much or as little power as you wish. You could choose to give your attorney-in-fact power to do some or all of the following:
How do I create a power of attorney? Although you don’t necessarily need an attorney to prepare a power of attorney, it is highly advisable in view of the potential for error or unknown consequences. You should know, however, that powers of attorney are required to be: in writing; signed by you in front of a notary public; dated appropriately; and clear on what powers are being granted. If you want to create a durable power of attorney, you must include a statement such as, "This power of attorney shall not be affected by incapacity or incompetence of the principal." Some banks and brokerage companies have their own power of attorney forms. If you want your attorney-in-fact to have an easy time with these institutions, you may need to prepare two (or more) durable powers of attorney, one using your own form and the forms provided by the institutions with which you do business. What happens if I don't have a durable power of attorney for finances? If you become incapacitated and you haven't prepared a durable power of attorney for finances, a court proceeding for guardianship or conservatorship is probably inescapable. Your spouse, closest relatives or companion will have to ask a court for authority over at least some of your financial affairs. Of course, this takes time... and money. If you are married, your spouse has some authority over property you own together. For example, he or she may pay bills from a joint bank account. There are significant limits, however, on your spouse's right to sell property owned by both of you. If your relatives go to court to get someone appointed to manage your financial affairs, they must ask a judge to rule that you cannot take care of your own affairs and request that the judge appoint a conservator or guardian. Again, this takes time... and money, unless you have a living trust in place. When does a power of attorney end? If you are mentally competent, you may revoke your original power of attorney at any time with a signed document. The revocation is not effective until the attorney-in-fact has received notice of the revocation. If you do not revoke it, a power of attorney ends at your death. If you want your attorney-in-fact to have authority to wind up your affairs after your death, use a will to name that person as personal representative. Also, if you get a divorce, and your spouse is your attorney-in-fact, your ex-spouse's authority is automatically terminated. Finally, if there is no one to serve as attorney-in-fact, the power of attorney ends. To avoid this problem, you can name an alternative attorney-in-fact in your document. The maker of the power of attorney may hold the original power of attorney document. This can allow the maker to remain in control and generally results in a simple revocation. WHAT IS A DURABLE POWER OF ATTORNEY FOR HEALTH CARE? A durable power of attorney for health care (also known as an Advanced Health Care Directive -- AHCD) allows your attorney-in-fact to make health care decisions for you when you can no longer make them yourself. It may also contain statements of wishes concerning such matters as life sustaining treatment and other health care issues and instructions concerning organ donation, disposition of remains and your funeral. IS AN ADVANCE HEALTH CARE DIRECTIVE DIFFERENT FROM A DURABLE POWER OF ATTORNEY FOR HEALTH CARE? The Advance Health Care Directive has replaced the Durable Power of Attorney for Health Care (DPAHC) as the legally recognized document for appointing a health care agent in California. The Advance Health Care Directive allows you to do more than a DPAHC. An Advance Health Care Directive permits you not only to appoint an agent, but to give instructions about your own health care. WHAT IS AN ADVANCE HEALTH CARE DIRECTIVE? Advance Health Care Directives include individual health care instructions regarding health care decisions for you and powers of attorney for health care (similar to the durable powers of attorney for health care). The Advance Health Care Directive also encompasses what was formerly included in a “living will” since individual health care instructions can now include your wishes about refusing or accepting life-sustaining treatment. An Advance Health Care Directive allows you to do either or both of two things. First, you may appoint another person to be your health care agent. This agent (also known as attorney-in-fact) will have legal authority to make decisions about your medical care if you become unable to make these decisions for yourself. Second, you may write down your health care wishes in the Advance Health Care Directive form -- for example, a desire not to receive treatment that only prolongs the dying process if you are terminally ill. Your doctor and your agent must follow your lawful instructions. IS AN ADVANCE HEALTH CARE DIRECTIVE DIFFERENT FROM A “LIVING WILL”? The Advance Health Care Directive is now the legally recognized format for a living will in California. The Advance Health Care Directive allows you to do more than the traditional living will, which only states your desire not to receive life-sustaining treatment if you are terminally ill or permanently unconscious. An Advance Health Care Directive allows you to state your wishes about refusing or accepting life-sustaining treatment in any situation in which you are unable to make your own decisions, not just when you are in a coma or are terminally ill. Previously executed Durable Powers of Attorney for Health Care and Natural Death Act Declarations remain valid. Thus, unless your existing DPAHC has expired, you do not have to complete a new Advance Health Care Directive. Because the new Advance Health Care Directive gives you more flexibility to state your health care desires, you may wish to complete the new form even if you previously completed a DPAHC or Natural Death Act Declaration. At a minimum, you should review your existing DPAHC or Natural Death Act Declaration to make sure it has not expired and that it still accurately reflects your wishes. WHO MAY I APPOINT AS MY HEALTH CARE AGENT? You can appoint almost any adult to be your agent. You can choose a member of your family such as your spouse or an adult child, a friend, or someone else you trust. You can also appoint one or more “alternate agents” in case the person you select as your health care agent is unavailable or unwilling to make a decision. The law prohibits you from choosing certain people to act as your agent(s). You may not choose your doctor, or a person who operates a community care facility or a residential care facility in which you receive care, or their employees, unless that person is related to you by blood, marriage, adoption, or is a co-worker. HOW MUCH AUTHORITY WILL MY HEALTH CARE AGENT HAVE? If you become unable to make your own health care decisions, your agent will have legal authority to make health care decisions for you. Your agent must make decisions that are consistent with any instructions you have written in the Advance Health Care Directive form or otherwise made known to your agent. Physicians and other health care professionals will look to your agent for decisions rather than your next of kin or any other person. If you have not made your wishes known, your agent has broad powers to decide what is in your best interests, considering your personal values to the extent they are known. Your agent can under no circumstances, however, authorize certain procedures specified by statute, including, convulsive treatment, psychosurgery, sterilization, abortion, or placement in a mental health treatment facility. Some of the specific powers which can be given (or denied) to your agent in the Advance Health Care Directive are the power to terminate life support, and the powers, after you die, to make organ donations, authorize an autopsy and direct the disposition of your remains. CAN I CHANGE MY ADVANCE HEALTH CARE DIRECTIVE? You can revoke or change an Advance Health Care Directive at any time. To revoke the entire form, including the appointment of your agent, you must inform your treating health care provider personally or in writing. Completing a new Advance Health Care Directive will revoke all previous directives. In addition, if you revoke or change your directive, you should notify every person or facility that has a copy of your prior directive and provide them with a new one. HOW LONG IS AN ADVANCE HEALTH CARE DIRECTIVE VALID? An Advance Health Care Directive is valid forever, unless you revoke it or state in the form a specific date on which you want it to expire. WHO CAN COMPLETE AN ADVANCE HEALTH CARE DIRECTIVE? Any resident who is at least eighteen (18) years old (or is an emancipated minor), of sound mind, and acting of his or her own free will can complete a valid Advance Health Care Directive. CAN I BE FORCED OR REQUIRED TO SIGN AN ADVANCE HEALTH CARE DIRECTIVE? No. The law specifically says that no one can require you to complete an Advance Health Care Directive before admitting you to a hospital or other health care facility, and no one can deny you health insurance because you choose not to complete an Advance Health Care Directive. DO I NEED A LAWYER TO COMPLETE AN ADVANCE HEALTH CARE DIRECTIVE? No. You do not need a lawyer to assist you in completing an Advance Health Care Directive form. The only exception applies to individuals who have been involuntarily committed to a mental health facility who wish to appoint their conservator as their agent. WHAT IS A DECLARATION OF HOMESTEAD? A Declaration of Homestead allows you, the homeowner, to exempt up to $150,000.00 (under certain circumstances) from a judgment which a creditor may obtain against you. A Declaration of Homestead is a simple legal document which can help to protect your house and property in times of economic hardship... it's a short form that can sometimes prevent the attachment of your land and dwelling by creditors. Homestead rights don't exist under common law, but they have been enacted in at least 27 states, including California. If you own, and live on, property in any of these states, you should definitely take the hour or so necessary to file this important document. Though they vary from one state to another, homestead statutes are similar in intent. They're designed to preserve family homes, which might otherwise be taken in times of monetary misfortune or upon the death of the head of the household. In general, this protection is available only if the declaration is filed in advance of such a catastrophe. Of course, a legal judgment resulting from business losses, auto accidents, or suddenly inherited debts could take a family's savings, however, with the safeguards provided by homestead statutes, their house and land would be protected up to the amount of exemption allowed by their state. By way of example only, say that your state has a $12,000 homestead exemption law, and your creditors are demanding $9,000. If your property is worth $12,000 or less, they can't attach your home as payment for this debt. On the other hand, if you owe $15,000 and your home is worth $20,000, your creditors can get a court order that forces you to sell. Even then, you still have some protection, since -- after the sale -- you'll get the $12,000 covered by your homestead exemption, and your creditors will receive only the remaining $8,000. You must, however, apply that $12,000 to the purchase of another home, usually within six months to a year, or your creditors can demand the additional $7,000 you owe them! Furthermore, some kinds of debts must be honored, with or without a Declaration of Homestead. If you've put your property up as collateral on a loan, for example, the homestead exemption does not apply. Other debts not covered include property taxes and special assessments. And if you fail to pay someone you've hired to make improvements on your house or land, he or she can place a mechanic's lien on your property and have it sold in order to collect the money. Although the cash value of homestead exemptions does vary, in most areas it's periodically adjusted upward to keep pace with inflation. Therefore, it pays homeowners to keep pressuring their legislators to increase these exemptions as the price of real estate rises. Fortunately, homestead laws are usually - in legal terms - "liberally construed". An apartment (if you own it), a mansion, a cabin, or a tent can qualify as a homestead... provided the dwelling is the bona fide residence of the claimant. If you haven't built a house yet, you might still be able to homestead your future home-site. A family is allowed only one homestead and must "show good faith in their claim". Summer vacation cabins, for example, on which declarations have been filed and accepted, have been taken away for debt payment. Outbuildings and land that are used by the family for enjoyment or livelihood are generally considered part of the homestead. But adjacent lots-or parcels next to a home that are held for idle investment purposes - might not qualify, unless they're gardened, logged, or farmed. Generally speaking, homestead exemptions apply only to married couples and their families. (Some states do have a head-of-household exemption that covers two or more people living as a family unit, provided one person supports the other members of the group.) Should one spouse die, the survivor and any children are protected under the exemption until the survivor dies and the youngest child is of age. And, naturally, the exemption terminates if you sell the property. Claims can be filed on successive dwelling places, but only on one site at a time. Some states -- Alabama, Arkansas, California, Florida, Georgia, Iowa, Louisiana, Minnesota, Mississippi, Missouri, Oklahoma, South Dakota, Texas, West Virginia, and Wyoming -- even permit a tax credit for homestead property. In these states owners are allowed to deduct some set amount from their yearly property tax assessments. If you're among those folks
lucky enough to live in a state that recognizes the Declaration of Homestead,
you'd be wise to get in touch with your county clerk or recorder right away for
complete information about the procedure. Filing the document is well
worth the few dollars and the little time it requires. It's a simple step that
could save you money... and it just might even save your home! The origin of state homestead laws: The federal Homestead Act, which was enacted in 1862, offered free 160-acre parcels of land to anyone willing to settle on them. After five years, these "homesteaders" would become the owners of the land, as long as certain conditions were met (such as building a house and living on the property). Though this act was repealed in 1976, many states have enacted their own homestead laws. If your state has one, it may protect some or all of the equity in your home against certain creditor claims. Caution: A homestead filing will protect your home from most debts (including judgments) that arise after the homestead becomes effective. It generally will not protect a home from debts incurred before the homestead status attaches, although you should check local state law to be certain. Caution: While the homestead laws in some states may substantially protect your residence from unsecured creditor claims, even through a bankruptcy filing, this is not always the case. You should consult an attorney about the protection offered by your state's homestead laws and other asset protection strategies. What homestead laws do? State homestead laws vary widely from state to state. Some offer property tax relief or other specific tax considerations to real estate owners. Generally speaking, however, most state homestead laws allow you to exempt a specified amount of the equity in your homestead property from attachment and seizure efforts by certain unsecured creditors. The intent of these laws is to ensure that you won't be forced to sell your home if you're otherwise unable to pay certain debts. How to obtain homestead law protection: The process of acquiring homestead law protection varies from state to state. Some states require you to live in the state for a certain length of time before you become eligible for homestead law protection. In a few states, coverage is automatic. In most states, however, someone who is named on the deed to the property and who lives there must file a notarized declaration of homestead form with a local government office, such as a registry of deeds. Sometimes the amount of the homestead exemption will depend on whether you file and record a Declaration of Homestead of simply rely on an “automatic” exemption. Generally, the property you homestead must be property that you own and occupy as your primary residence. In most states, property eligible for homestead law protection includes a single-family or multifamily home (and its lot), a condominium unit, or a mobile home. Protection limits: Homestead laws exempt from attachment a certain amount of the equity value in the homestead property. A few states offer unlimited protection; in Florida, for example, the homestead law completely exempts a multimillion-dollar mansion's total value from attachment by certain unsecured creditors. That may be one reason O. J. Simpson is now living there. Most states, however, assign a limit to the amount of protection offered by their homestead laws. These limits vary widely. For instance, an individual homeowner in California may be eligible for only $50,000 in exemption protection, while the same homeowner in Massachusetts would receive $500,000 in protection. Example(s): You are a single individual, your home is valued at $450,000, and it carries a mortgage lien of $200,000 against it. Your equity is then $250,000 ($450,000 - $200,000). If you live in California, you may use the homestead law there to protect $50,000 of that equity, leaving $200,000 unprotected. However, if you live in Massachusetts, your state's homestead declaration exempts all $250,000 of your equity from unsecured creditor attachment. It's important to note that the homestead laws do not automatically prevent a forced sale of your primary residence to satisfy a creditor claim. In the example above, if you live in California, the sale of your home could be forced to satisfy such a claim, since the creditor could be paid from the sale's equity proceeds over and above the amount the homestead law exempts from attachment. If you live in Massachusetts, however, the homestead law would exempt up to $500,000 of a sale's equity proceeds from attachment; in this case, there would be no point in a creditor forcing a sale of the property to satisfy a claim. Caution: If the equity value of your property increases over time (as your mortgage balance decreases and/or property values rise), it may exceed the exemption protection allowed by your state's homestead law. In that event, should a forced sale occur to satisfy a creditor claim, the homestead law would protect some, but not all, of the equity in your home. Some creditors are not subject to homestead law protections Homestead laws do not protect your home from all creditors. Generally, these laws exempt a portion of the equity in your principal residence from attachment by creditors to whom you owe unsecured debts (e.g., medical bills, credit card balances, and personal loans), even if the creditor has obtained a court judgment against you. Other debts are simply not subject to the exemption protection homestead laws offer. These include:
Homestead laws and bankruptcy: State homestead laws can profoundly affect whether or not you may keep your home in bankruptcy. In bankruptcy, you are not required to surrender exempt property to satisfy the claims of creditors. The federal government allows individuals an $18,450 (effective as of April 1, 2004) exemption in bankruptcy for real estate used as a primary residence. This federal exemption can vary significantly from what you may be allowed to keep under your state's exemption laws. Some states require you to follow their exemption laws when filing for bankruptcy. In such cases, you'll have no choice about the amount of your home exemption; you'll be able to keep what your state's homestead law allows. Other states allow you to choose between the federal and state exemption laws. In states where you have a choice, your decision about how to file for bankruptcy may turn in part on which set of rules allows you to keep the greatest amount of your home's value. In such cases, if your state homestead law allows a more liberal home exemption than the one allowed by the federal law, filing for bankruptcy under the state exemption laws may increase the probability that you'll keep your home, particularly if you have substantial equity in it. Example(s): Jimmy, a single individual, lives in Georgia, where he owns a modest home valued at $100,000. When he files for bankruptcy against $97,000 in unsecured debt, he is required to do so under the Georgia exemption laws, which allow him to keep a homestead worth only $5,000. Since the value of his home exceeds that amount, he must sell his home, keep $5,000 of the sale proceeds as allowed by the state exemption laws, and distribute the remainder to the creditors named in his bankruptcy petition to partially satisfy their claims. Meanwhile, George, a single individual, lives in Texas, where he owns a ranch valued at $750,000. When he files for bankruptcy against $325,000 in unsecured debt, he is allowed to elect either the federal or the state exemption laws. Since Texas homestead law exempts a residence of unlimited value, George chooses to file under the state exemption laws. He is not required to sell his ranch to raise money to satisfy the creditors named in his bankruptcy petition. For bankruptcy filings made on or after April 20, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (2005 Bankruptcy Act) imposes certain restrictions on state homestead exemptions, as follows:
Caution: For bankruptcy filings made on or after October 17, 2005, there is a two-year residency requirement for using state homestead exemptions. Specifically, to use a state's exemption, you must have resided there for 730 days (about 2 years) prior to filing bankruptcy. If you resided in more than one state during this 730-day period, the governing exemption law will be of the state in which you resided for the majority of the 180-day period (about 6 months) preceding the 730-day period. You may wish to view the relevant portions of the California Code of Civil Procedure pertaining to the Homestead. |
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