State law typically establishes a homestead exemption. This means that a person who has established a homestead (generally the person's principal residence) is protected from a creditor taking the homestead in satisfaction of a judgment. The problem is that the exemption is limited to a specific statutory amount which varies widely from state to state. Moreover, in bankruptcy, the homestead exemption amount may also be dependent upon how long one has owned the homestead.
In Michigan, the homestead exemption is a mere $3,500. In Florida, it is unlimited. There are many stories of debtors having judgments against them for millions of dollars who bought multimillion dollar homes in Florida which are now protected from creditors.
The establishing of homesteads in high or unlimited homestead exemption states for the purpose of avoiding creditors was perceived by lawmakers to be abusive. Therefore, amendments were made to the Bankruptcy Code to inhibit debtors from moving from one state to another to garner a greater homestead exemption. One of the changes is that a debtor is bound by the exemptions of his prior state of residency unless he has established residency in a new state for at least 2 years. In addition, the debtor may not claim a homestead exemption of more than $125,000 unless the debtor has resided in the more generous state for at least 40 months prior to the filing of a bankruptcy petition.
Bear in mind that these limitations are only relevant if the debtor is in bankruptcy. Outside of bankruptcy the state exemptions apply without limitation. This creates some interesting planning opportunities balancing the benefits of a bankruptcy filing against taking advantage of a beneficial homestead exemption while at the same time considering whether the purchase of the homestead may be considered a fraudulent transfer and what the effects of that may be.
It is clear that homestead exemption planning requires very careful analysis of a myriad of different laws, including the laws of different states. At Weisman Young & Ruemenapp we apply our years of knowledge and experience to each unique situation and work with other states' attorneys to make sure the client is fully informed and properly advised before taking any action. Please contact us at 248.258.2700 if we may assist you with any of your asset protection planning needs.