New Case Law and Possible Legislation Affecting Homesteads in Massachusetts
A Homestead declaration is an effective and well-known technique for protecting one's personal residence from creditors. The statute governing homesteads is located at Massachusetts General Laws Ch. 188. An individual may protect up to $500,000 of equity in his or her home, provided that the homeowner has filed the proper paperwork at the appropriate Registry of Deeds. There is legislation pending that, if passed, would provide an automatic $125,000 homestead exemption without the need to file a declaration at the Registry of Deeds.
As a starting proposition, homes that are in a trust have not been eligible for homestead protection. Assistant Recorder of North Registry District of Bristol County v. Spinelli, 38 Mass. App. Ct. 655 (1995). The Homestead statute protects homeowners, and an individual who places his home in a trust does not technically own it.
One way around this is to reserve a life estate for oneself when conveying the property into the trust. A life estate is the grantor's right to use and occupy real estate during his or her lifetime. This reserved property interest is kept outside of the trust and is therefore eligible for homestead protection. The portion of the property that is put into the trust is called a remainder interest, and does not belong to the grantor. So, it is not eligible for homestead protection, but that is not necessarily a bad thing. After all, if the remainder interest does not belong to the grantor, his creditors cannot reach it. See In re Zmijewski, 390 B.R. 24 (Bankr. D Mass. 2008).
A recent Bankruptcy Court decision may be good news for individuals wishing to use a homestead declaration to protect property that is held in a trust. On February 23, 2010, the Court held that a debtor in a Chapter 7 proceeding could declare a homestead with respect to her home in a revocable trust. In re Rodrigues, Case No. 09-11960 JNF. It remains to be seen whether the Supreme Judicial Court of Massachusetts will overturn Spinelli, but there are encouraging signs. In a subsequent case, the SJC wrote, " ... in light of the public policy and the purpose of the statute, the State homestead exemption should be construed liberally in favor of debtors." Dwyer v. Cempellin, 424 Mass. 26 (1996). Hopefully, the SJC will follow the lead of the Bankruptcy court and hold that beneficiaries of a trust that holds title to real estate used as a personal residence will be able to make use of the homestead statute.
