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Caution: Use of Revocable Trust May Void Homestead Protection

A "homestead exemption" protects part of a home's value (or in a couple of states, all of its value) from being sold to meet the demands of creditors. However, placing the home in a revocable trust may void this homestead protection.

The use of revocable trusts, which often are employed as a way to avoid probate, has been on the rise. But two bankruptcy courts have reached different conclusions on the question of whether a home in such a trust is entitled to the homestead exemption.

In the case In re Estarellas, the U.S. Bankruptcy Court for the District of Connecticut held that the debtor, whose home was held in a revocable trust, could not claim protection under Connecticut's homestead exemption. The court ruled that because the debtor had transferred title in the property to the trust, she no longer had any interest in the property and could not claim homestead protection. In re Estarellas (Bankr. D. Conn., No. 03-22287, Feb. 23, 2006).

However, in another case, In re Kester, the U.S. Court of Appeals for the 10th Circuit determined that although a couple had placed their home in a trust, they still had enough of an interest in it to claim the exemption and protect the home from creditors. In re Kester (10th Cir., No. 06-3114, July 10, 2007).

Before placing your home in a revocable trust you should consider this implication and discuss it with a qualified elder law attorney familiar with the laws and practices of your state.

For the full text of Estarellas, click here and scroll down to "03-22287".

For the full text of Kester, click here.