In Texas, a person’s homestead has a special status in two respects. First, Sections 11.13 – 11.135 of the Texas Property Tax Code provides for property tax exemptions for homesteads. Second, Chapter 41 of the Texas Property Code states that a person’s homestead is exempt from his general creditors. You can read more about these provisions here.
These privileges are specific to individual owners who occupy their homes. For example, homestead exemptions generally are not available for rental properties. Likewise, property held in a business entity, such as an LLC, will not be exempt from general creditors.
So what about trusts? Quite often, real estate is held in trust for the benefit of the trust’s grantor or for the benefit of one or more beneficiaries. Can a home held in trust qualify for both privileges?
The answer is “yes,” so long as the homestead property is in “qualifying trusts.” What is a qualifying trust? Due to a recent bankruptcy court opinion, the answer is no longer as clear as many practitioners previously believed.
Section 11.13(j)(3) of the Property Tax Code states:
“Qualifying trust” means a trust:
(A) in which the agreement, will, or court order creating the trust, an instrument transferring property to the trust, or any other agreement that is binding on the trustee provides that the trustor of the trust or a beneficiary of the trust has the right to use and occupy as the trustor’s or beneficiary’s principal residence residential property rent free and without charge except for taxes and other costs and expenses specified in the instrument or court order:
(i) for life;
(ii) for the lesser of life or a term of years; or
(iii) until the date the trust is revoked or terminated by an instrument or court order that describes the property with sufficient certainty to identify it and is recorded in the real property records of the county in which the property is located; and
(B) that acquires the property in an instrument of title or under a court order that:
(i) describes the property with sufficient certainty to identify it and the interest acquired; and
(ii) is recorded in the real property records of the county in which the property is located.
This is the statute relating to property tax exemptions. Pay attention to the emphasized text.
Now, let’s look at the Property Code to see what a qualifying trust is when it comes to protecting the homestead from your general creditors. Section 41.0021 states:
HOMESTEAD IN QUALIFYING TRUST. (a) In this section, “qualifying trust” means an express trust:
(1) in which the instrument or court order creating the express trust provides that a settlor or beneficiary of the trust has the right to:
(A) revoke the trust without the consent of another person;
(B) exercise an inter vivos general power of appointment over the property that qualifies for the homestead exemption; or
(C) use and occupy the residential property as the settlor’s or beneficiary’s principal residence at no cost to the settlor or beneficiary, other than payment of taxes and other costs and expenses specified in the instrument or court order:
(i) for the life of the settlor or beneficiary;
(ii) for the shorter of the life of the settlor or beneficiary or a term of years specified in the instrument or court order; or
(iii) until the date the trust is revoked or terminated by an instrument or court order recorded in the real property records of the county in which the property is located and that describes the property with sufficient certainty to identify the property; and
(2) the trustee of which acquires the property in an instrument of title or under a court order that:
(A) describes the property with sufficient certainty to identify the property and the interest acquired; and
(B) is recorded in the real property records of the county in which the property is located.
In the case of In re: Cyr, the U.S. Bankruptcy Court of the Western District of Texas, San Antonio Division, held that the Property Tax Code’s phrase, “rent free and without charge” means something different than the Property Code’s phrase, “at no cost.”
The result was that the debtor was entitled to a break on his property taxes, but his home was subject to the claims of his general creditors!
What exactly the distinction is between “rent free and without charge” and “at no cost” seemed to elude even the bankruptcy court, itself, when it commented as follows in its opinion:
… “at no cost” is broader than “rent free and without charge” and conceivably includes costs and expenses other than those related to rent. (emphasis added)
Sadly, the debtor “conceivably” lost his homestead!
Cyr is not a a good decision to have on the books, and as of the time of this article, it remains the only authority on this point. Some practitioners, including me, believe there is a substantial likelihood that if (when) this issue arises again in another court, we will wind up with a split in authority.