Keep Creditors from Getting to Your Personal Residence (Homestead Exemptions)

Every state and the federal government provide that certain property is exempt from the claims of creditors. This means that no matter how much you owe, your creditors cannot take this property away from you. In some states the property you can keep is only worth a few thousand dollars, but in other states, it can be millions of dollars. The rationale is that if people could lose everything they own to creditors, including their home and car, and tools of their trade, they would be a burden on society, which would then have to support them. Allowing them to keep some property affords them the ability to get a fresh start.

A homestead exemption allows you to keep your home or a portion of the equity in your home. Almost all states offer some type of exemption of a person’s home from the claims of creditors. Unfortunately, in many states, it is a very small amount.

Some states, such as Florida, Oklahoma, Texas, Arkansas, Iowa, Kansas and South Dakota, offer either unlimited or nearly unlimited homestead protection. In these states, the opportunity exists for a debtor to protect literally millions of dollars in his or her personal residence. Yet, even homestead protection has significant defects.

• Homestead exemption does not protect against federal tax liabilities, or state tax liabilities of the state where the property is located.
• Homestead only protects a primary residence, not vacation homes.
• Homestead traps the value of the residence within the debtor's estate. In other words, the money becomes fair game if the property is sold or passed to beneficiaries.

The laws vary from state to state regarding what type and amount of homestead is protected. In some states, only traditional single-family homes are protected, but in many others, condos, co-op apartments and mobile homes are protected, as well. Some states limit the physical size of the homestead. In a number of states the dollar limit is based on the person’s interest in the property; in others, it is based on the entire property.

In many cases homestead rights have been very liberally construed and people have been allowed to keep oil and gas rights, crops growing on the property and expensive additions to property.

Because the laws vary so much from one state to another, owners of valuable residences would be wise to seek advanced solutions to attempt to protect the value of their residence and to transfer that value outside of their estate. Speak to an attorney or a financial advisor who is well versed in asset protection planning for advice.