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This is an outline of the unique protections available to an individual´s residence and personal property by what are commonly referred to as the "Texas homestead laws" contained in Art. XVI, Sec. 50 of the Texas Constitution and in Texas Property Code Chapters 41 and 42. Note that this article addresses exemptions afforded solely by Texas (not federal) law and applies primarily to execution upon Texas court judgments. It is not intended to be a guide to rules or available exemptions in U.S. bankruptcy court – consult a board-certified bankruptcy attorney to discuss those matters. I will only observe that bankruptcy rules are tougher on debtors. Generally speaking, if a Texas debtor can stay out of bankruptcy, hunker down, and utilize state protections, then that is the preferable course.

The homestead has always been sacred in Texas, reaching back to Republic of Texas and even before (See Stephen F. Austin´s Code of Civil Regulations, 1824). The Texas Constitution and Property Code (see Tex. Const. Sec. 28 and Tex. Prop. Code Sec. 42.001(b)(1)) provide that the homestead of a family or single adult is protected from forced sale for purposes of paying debts and judgments except in cases of purchase money, ad valorem taxes, owelty of partition (divorce), home improvement loans, home equity loans, reverse mortgages, liens pre-dating the establishment of homestead, refinance loans, or the conversion or refinance of a lien on a mobile home that is attached to the homestead. Other liens are void. Further, even a permitted lien must be in writing and signed by both spouses in order to be valid. The protection of the homestead combined with the prohibition against garnishment of wages has long made Texas a haven for debtors.

It is quite possible to make a good salary (no monetary limit), own a paid-for million dollar home, drive a paid-for car, have numerous judgments against you (from Texas or other states), and be reasonably secure under Texas law from creditors – although your dealings in current cash accounts may be severely restricted. As to the home itself, there is no dollar limitation on its exempt value (see In re McCombs, 659 F3d 503, 507 (5th Cir. 2011). This differs from other jurisdictions where judgment creditors can literally put a homeowner on the street with only the clothes on his back.

Asset protection planning in Texas relies on the constitutional and statutory homestead protections at its core. Add a living trust to the mix, and asset protection and estate planning can be combined into an effective unified structure. Of course, if investment assets are involved (e.g., a business or rental property) then it may also be prudent to consider forming an LLC to hold these assets separately.

Texas homestead laws are liberally construed by the courts (London v. London, 342 S.W.3d 768, 776 (Tex.App. – Houston [14th Dist.] 2011, no pet.). "Indeed, a court must uphold and enforce the Texas homestead laws even though in so doing the court might unwittingly assist a dishonest debtor in wrongfully defeating his creditor." Painewebber, Inc. V. Murray, 260 B.R. 815, 822 (E.D.Tex. 2001). Unless an individual judgment debtor owns investment real estate, sums of cash or cash-equivalent assets, or a business with attachable inventory – or engages in detectable fraud in concealment of assets - a judgment against him may be uncollectable. In such a case, it is said that the debtor is "judgment proof."

Texas homestead protections are available only to individuals – not corporations, partnerships, or LLC´s – and they do not encompass investment or business assets, which should be held in a traditional Texas LLC or the new Texas Series LLC. For more details, read our companion article Asset Protection in Texas.

If your intent is to get a quick list of what items are exempt and what are not, then you may skip this article and go directly to the attached exhibit.

The answer is not as obvious as one might think. Texas law suggests that a person´s homestead is primarily a question of intent. However, it must be rooted in real property. A yacht, for instance, is not homestead but moveable chattel (see Norris v. Thompson, 215 S.W. 3d 851 (Tex. 2007). But a vacant lot can be homestead if the owner has reasonable expectations of building a home on it; a leasehold estate can be homestead; a life estate may also qualify; and even a beneficial interest in a trust holding real estate can be homestead.

Property Code Sec. 41.002 supplies the following size limitations:

Note that this definition applies to realty and fixtures, not movable personal property. Movable, non-affixed items on the homestead property are not considered part of the homestead and are not exempt from execution unless such items are specifically included in the list of exempt personal property under Sec. 42.002 (see below).

A person may claim an urban homestead or a rural homestead but not both. What constitutes "urban" versus "rural" has been the subject of much litigation. It is a fact issue that may differ from case to case. Once established, however, the initial characterization of the property as urban or rural continues even if the nature of the surrounding area changes. U.S. v. Blakeman, 997 F. 2d 1084.

Also, one may not have an urban residential homestead and a business homestead (a place to exercise a calling or business). To qualify, the homestead must be used either for residential homestead or as both residential homestead and business homestead (see Tex. Const. Art. XVI Sec. 51 (Vernon Supp. 2012); Tex. Property Code Sec. 41.002(a); and Majeski v. Estate of Majeski, 163 S.W.3d 102 (Tex. App. – Austin 2005, no pet.).

The act of living upon and utilizing a piece of real property essentially settles the issue of whether or not it is homestead. "The possession and use of land by one who owns it and who resides upon it makes it homestead in law and fact . . . Once property has been dedicated as homestead, it can only lose such designation by abandonment, alienation, or death. After the party has established the homestead character of the property, the burden shifts to the creditor . . . to disprove the continued existence of the homestead." Wilcox v. Marriott, 103 S.W.3d 469, 472 (Tex. App. – San Antonio 2003, pet denied).

A family may have only one homestead. What is a family? That is a flexible definition in Texas so long as the head of household is legally or morally required to support a least one other family member. Note that individual family members may not also claim separate homesteads.

Can persons from other states declare their intent to reside in Texas and designate a protected homestead there? Yes. If the issue is raised in court, it will be a fact issue to determine whether or not such a declaration was made in good faith (or with the obvious intention of defrauding creditors) and whether there is some actual occupancy as well as additional evidence such as a Texas driver´s license, voter registration card, etc. This is not a difficult test to meet, since there is no minimum number of days a person must physically reside in Texas in order to claim a homestead in the state. If someone has multiple lawsuits and judgments, then moving to Texas to establish a homestead may be an excellent asset protection strategy. After all, people move to Texas every day for many good reasons.

The Property Code provides in Sec. 41.001(5)(c) that "The homestead claimant´s proceeds of a sale of a homestead are not subject to seizure for a creditor´s claim for six months after the date of sale." This expressly permits homestead protections to be rolled over from one homestead to the next, notwithstanding the preference on the part of title companies to collect judgments upon sale of the homestead. Taylor v. Mosty Bros. Nursery, Inc., 777 S.W.2d 568, 570 (Tex.App. – San Antonio 1989, no writ).

It is useful, both for ad valorem tax purposes and for protection from creditors, to file an affidavit designating the homestead in the real property records of the county in which the property is located (Prop. Code Sec. 41.005). However, for protection from creditors, this is not necessary; the homestead arises automatically when required legal conditions occur (Graham v. Kleb, 2008 WL 243669 at *4 (S.D. Tex. 2008). Also, if a person receives a homestead tax exemption then creditor protection is automatic.

A creditor is on notice that homestead protections will apply if the debtor occupies a homestead. "When a homestead claimant is in actual occupancy of his homestead, it will be deemed that a lender or encumbrancer acted with knowledge of the occupant´s right to invoke the rule of homestead." Sanchez v. Telles, 960 S.W.2d 769, 772 (Tex. App. – El Paso 1997, pet. Denied). Moreover, the homestead is presumed to endure. "Once property has been dedicated as homestead, it can only lose such designation by abandonment, alienation, or death. After the party has established the homestead character of the property, the burden shifts to the creditor . . . to disprove the continued existence of the homestead. In other words, a homestead is presumed to exist until its termination is proved." (Wilcox v. Marriott, 103 S.W.3d 469, 472 (Tex App. – San Antonio 2003, pet. denied). Once obtained, homestead rights are not easily lost. A homestead claimant may even temporarily rent the property so long as another homestead is not acquired (Prop. Code Sec. 41.003).

Note that it is not necessary that a homestead claimant actually reside on the property at the time homestead is claimed. "A homestead exemption may be established upon unoccupied land if the owner presently intends to occupy and use the premises in a reasonable and definite time in the future, and has made such preparations toward actual occupancy and use that are of such character and have proceeded to such an extent as to manifest beyond doubt the intention to complete the improvements and reside upon the place as a home." Farrington v. First Nat´l Bank, 753 S.W.2d 248, 250-251 (Tex.App. – Houston [1st Dist.] 1988, write denied). Therefore, the key issues are intent and preparation. By these criteria, even a vacant lot can be homestead. So can a life estate or an executory interest (e.g., a purchaser´s equitable title under a contract for deed). Generally, however, to in order to make a valid homestead claim, a person must have a present and exclusive possessory interest in the property.

A person may also execute an affidavit disclaiming particular property as homestead (and, optionally, designating other property as homestead), and a lender is entitled to rely on such an affidavit in making a loan that will be secured by non-homestead property. This is typically referred to as a "non-homestead affidavit."

Although there is a conceptual overlap, the homestead protection laws should not be confused with the homestead tax exemption as reflected on the rolls of an appraisal district, which is designed to lower ad valorem taxes on homeowner-occupied property. Note that it is now possible to put your homestead in a living trust and not lose the homestead tax exemption.

These are a headache. Texas courts have ruled that although a judgment lien may be unenforceable against a homestead, it may nonetheless constitute a cloud on title, even if it is invalid. Tarrant Bank v. Mark B. Miller, et al., 833 S.W.2d 666 (Tex.App. – Eastland 1992). This generally results in title companies (being the conservative, risk-averse institutions that they are) refusing to issue title insurance unless a seller/debtor´s judgments are paid, notwithstanding the six-month rollover protection contained in Property Code Sec. 41.001(5)(c). The remedy is found in Property Code Sec. 52.0012 (passed in 2007), which provides a statutory method for securing a release of a judgment lien against homestead property – but only for judgments abstracted after 2007. See our companion article on LoneStarLandLaw.com, Lien Removal in Texas.

It is not just realty that is protected. Chapter 42 of the Texas Property Code specifically lists the amount and types of exempt personal property. Personal property valued at $60,000 for a family or $30,000 for a single adult (exclusive of liens) is exempt from garnishment, attachment, execution or other seizure so long as it is on the following list:

Pursuant to Sec. 42.001(b)(1), "current wages for personal services, except for the enforcement of court-ordered child support payments" is exempt "from garnishment, attachment, execution, and other seizure." This includes severance pay. Note that wages are expressly exempted from the $60,000 family limit and the $30,000 single adult limit. Additionally, "unpaid commissions for personal services not to exceed 25 percent" of these limits are also protected.

Is it possible as an asset protection measure to create a corporation, LLC, or partnership that will pay you wages so that you can declare them exempt? Possibly, so long as it can be established that the corporation, LLC, or partnership is truly a distinct entity that independently conducts business and declares income.

Case law imposes some caveats, however, on the protection of wages. "Once wages are received by the debtor, they cease to be current wages and are not exempt from attachment, execution or seizure for the satisfaction of liabilities" – although this is not true of social security payments (42 U.S.C. Sec. 407). In other words, cash in hand is vulnerable. It can be attached, and very easily so if it is residing in a bank or investment account. Also, note that the term "current wages" is interpreted to mean a regular salary or hourly pay – not compensation paid to an independent contractor. Payments to independent contractors are not protected. See Brink v. Ayre, 855 S.W.2d 44 (Tex.App. – Houston [14th Dist.] 1993, no writ).

Retirement plans (IRA´s and 401k´s) are exempted under Sec. 42.0021 so long as contributions do not exceed the amount that is deductible under current law. Rollover proceeds are exempt for sixty days.

Also exempted under Sec. 42.0021 are certain savings plans "to the extent that the plan, contract, annuity, or account is exempt from federal income tax, or to the extent federal income on the person´s interest deferred until actual payment of benefits to the person" under the Internal Revenue Code.

College tuition funds (including IRS Sec. 529 funds and accounts established under Subchapter F, Chapter 54 of the Texas Education Code) are exempted under Sec. 42.0022.

Sec. 1108.001 of the Texas Insurance Code adds the cash value of annuities and life insurance policies to those items which are exempt from garnishment, attachment, execution, or other seizure under Chapter 42 of the Property Code. This section "applies to any benefits, including the cash value and proceeds of an insurance policy, to be provided to an insured or beneficiary under . . . an insurance policy or annuity contract issued by a life, health, or accident insurance company."

Interests in corporations, partnerships and LLC's are not protected from the consequences of a judgment. In Texas, stock in a corporation is personal property (Tex. Bus. Orgs. Code Sec. 21.802) that can be subject to levy (Tex. R. Civ. P. 641 and Tex. Bus. & Com. Code Sec. 8.112), garnishment (Tex. R. Civ. P. 669) or turnover (Sec. 31.002 of the Civil Practices & Remedies Code). However, partnership and LLC interests are subject only to a charging order, which means that if distributions occur (and only if they occur), then the creditor may attach them (See Tex. Bus. Orgs. Code Sec. 101.112 for LLC's and Sec. 152.308 for partnerships).

Prop. Code Sec. 42.004 states that an exemption is lost or if non-exempt assets are used to buy or pay down indebtedness on exempt assets "with the intent to defraud, delay, or hinder" a creditor. This reaches back two years for liquidated claims, one year for unliquidated or contingent claims. However, proving such intent (and therefore getting the transfer set aside) can be difficult for a creditor, particularly if the debtor asserts that the subject transactions occurred in the ordinary course of business. Neither life nor business comes to a halt when someone is sued. Both the Property Code and courts recognize this, which is why 42.004(c) states that it "is a defense under this section that the transfer [of non-exempt assets into exempt form] was made in the ordinary course of business by the person making the transfer."

So should a potential judgment debtor give up on moving non-exempt assets out of his or her name? Absolutely not. If you have available cash, pay down the homestead. Pay off the car. It remains the burden of the creditor to both discover such transfers and prove that they were impermissible. Judgment creditors vary widely in the energy and determination they expend on post-judgment collection efforts. For instance, most judgment creditors will send "post-judgment discovery"" demanding that you disclose your assets; but many creditors do not even bother to do this, perhaps electing to wait until the debtor attempts to sell non-exempt real property and the title company involved requires that the judgment be either paid, settled, or otherwise released. How aggressive a creditor is going to be in any given case is entirely unpredictable.

Here is an interesting example of fraudulent intent: a failed builder, owing millions on notes that he signed or guaranteed, conspired with his wife to file for divorce and then transfer substantially all of their community assets to the wife in the settlement. After the divorce was final, the husband filed bankruptcy showing few or no assets and sought to discharge the debts. The bankruptcy trustee notices that the husband never moved out of the couples' very expensive home, and he rightfully became suspicious. Not a surprise.

The Texas Constitution and Property Code already provide the homestead with substantial asset protection. However, placing the homestead into a living trust can add a measure of anonymity – an important element of asset protection – and, when joined with a "pour over" will, accomplish significant estate planning as well, since the delay and expense of probate may be reduced or eliminated. Why? Because the living trust does not "die," and title therefore remains in the trust regardless of the death of one of the beneficiaries. This is a highly recommended structure. See our companion article on LoneStarLandLaw.com, Living Trusts in Texas.

Property Code Sec. 41.0021 entitled "Homestead in a Qualifying Trust" specifically allows a homestead to be transferred into a living trust without losing its exempt character.

Investment properties and business assets do not receive the same protection as the homestead, so for investors it is not sufficient to rely on statutory homestead protections. Investment properties should be kept entirely separate from the homestead and placed in a traditional Texas LLC or a Texas Series LLC (which has the ability to compartmentalize assets and insulate each of them from the liabilities associated with other assets in the company). The Texas Series LLC is an outstanding device and should be the core of an asset protection program for a real estate investor. Read our companion article The Texas Series LLC.

A suggested asset protection program would include the following:

Homestead law has been heavily litigated in Texas, and any steps taken by either a creditor or debtor are subject to case-by-case review by a court with results that may occasionally be difficult to predict. Nonetheless, maximizing statutory and constitutional homestead protections is an important part of an asset protection plan. If one's assets include substantial cash or investment properties, then it is advisable to consider establishing a series LLC to hold non-exempt assets.