Friday, 12 June 2009 10:00 Last Updated on Friday, 12 June 2009 10:32
A Florida beach home might be your idea of comfortable retirement. Unfortunately, as we’ve seen over the past several years, it has also been a way for some unscrupulous debtors to live luxuriously and out of the reach of honest people to whom they owe money. These debtors simply and legally avail themselves of Florida’s generous homestead protection whereby their Florida homestead – no matter how valuable – is protected from creditors.
While some states capped their homestead protection at a nominal amount to avoid such debtor abuse, it remains unlimited in a few states: Kansas, Florida, Iowa, South Dakota and Texas. Their unlimited homestead protection is a good example of why the federal legislature felt it was time to take action. Faced with a public policy need to assist those in true financial straights and with an increase public pressure to prevent able debtors from defrauding legitimate creditors, the legislature focused on making able debtors pay. In a move that encourages sound financial planning, they changed the federal bankruptcy law.
Since 2005, although your homestead is still protected from creditors, the new federal law may cap that protection. Once the new law becomes effective, regardless of how generous your state’s law, your homestead protection may be capped at $125,000 in home equity.
Under the new law, if you move from one state to another, until you live in your new home 40 months, the federal law caps your protected equity at $125,000. Which, if your equity in your new home is $125,000 (or less), is not a problem. Your equity is safe…today. During those 40 months, however, as the value of your home increases, your equity increases and so does the amount available to creditors.
If you move within the same state, even though you may have lived in your new home less than 40 months, you may be entitled to more protection than the $125,000 federal cap. If you lived in your prior home and your new home for an uninterrupted 40 months or more, any equity received from the sale of your prior home and rolled into your new home is fully protected – it does not count toward the $125,000 cap. Suppose you have $200,000 in equity in a home you’ve owned for five years and that your state homestead laws protect $200,000 in equity. If you sell your home and use that equity to purchase a new home, all $200,000 of the equity you rolled into your new home remains fully protected. The $125,000 cap does not apply to the equity you rolled into your new home.
This new federal $125,000 cap on homestead protection is only important if you file bankruptcy and it does not change your state homestead protection. It merely provides uniformity among the states by reducing the equity protected amount in states, such as Florida and Texas, with more generous homestead protection.
So, what does this mean to you?
Simply put, the moral of the story is, there’s no such thing as a sure thing. Laws change and your financial plan may need to reflect those changes. A sound financial plan incorporates risk management techniques – not just insurance - based on what best suits your personal needs. The goal is to ensure that the risk management component of your financial plan provides the security you need so that you don’t find yourself fleeing to Florida. Oh, and one last word about that: if your idea of risk management still involves a move to Florida, do it early. The longer you wait, the later your 40 month clock starts ticking.
Risk management questions or concerns should be directed to your financial advisor.
This material was prepared by Raymond James for use by Timothy J. McNeely, Financial Advisor of Raymond James Financial Services, Inc. Member FINRA/SIPC.
