How to Protect Your Home
Most states provide a homestead exemption that protects some or all of the equity in a home from claim in the event of bankruptcy. (Causing some confusion, many states also use the term “homestead exemption” to refer to a property tax reduction for owner-occupied property.) Most, but not all states, put a limit on the amount of equity protected, limiting it either by dollar value or a specific number of acres, sometimes having different acreage limits for urban and rural areas of the state. Depending on the state, the protection may be automatic or may require the recording of a declaration of homestead at the registry of deeds or elsewhere. In my state of Massachusetts, for instance, all homeowners have automatic protection of $125,000. They can protect an additional $375,000 ($500,000 in total) by filing a declaration of homestead at the appropriate registry of deeds. In most cases, these limits apply to both spouses, meaning that whether one or both own the property and file homestead declarations, they’re limited to the $500,000 protection. But if both spouses are disabled or are over age 62, they can each protect up to $500,000 of equity for a total protection of $1 million.
Note that homestead protections do not supersede mortgages or other liens. In addition, there’s no homestead protection for non-owner-occupied property and you will lose the homestead protection if you move out of your home. Once the property is sold, you will have cash which is not protected, though your state may permit a grace period while you are investing the money in a new home. Finally, when you pass away, the homestead protection disappears, though there may be some protection extended to a surviving spouse and, if your heirs live in the house, they can establish their own homestead protection.
While to our knowledge, none of our clients so far has taken advantage of the homestead exemption because they have not faced bankruptcy or a claim that exceeded their homeowner’s insurance coverage, we always counsel them about the homestead declaration in large part so that no fingers are pointed at us the first time a client needs the protection.
Florida has no limit on the equity protected by its homestead exemption and as a result has become the refuge of some notorious debtors, the most famous being Bowie Kuhn and O.J. Simpson. Bowie Kuhn, a former commissioner of baseball, fled to Florida after the bankruptcy of his law firm, Myerson & Kuhn in 1989, thus avoiding a $3.1 million claim from a bank that had lent money to the firm. O.J Simpson won his murder trial, but lost a $33.5 million civil suit brought by Ron Goldman and Nicole Brown’s family. So he moved to Miami, eventually losing the house to the mortgage holder, J.P. Morgan Chase after he was jailed in Nevada.
If your state’s homestead protection is not sufficient to shelter all of the equity in your home, there are other steps you can take. The first, of course, is buying sufficient insurance. Often people purchase an umbrella policy over and above their standard homeowner’s insurance. People who work in professions where there’s a possibility that they will be sued for a large amount, such as doctors, often title their homes in the name of their spouses. If, for instance, the husband who is a surgeon and makes a mistake, his spouse who is not at fault cannot be forced to help satisfy the claim. Trusts are also often used to protect homes from creditors and for long-term care planning to permit the owner to qualify for Medicaid coverage.