When it comes to asset protection the majority of attention is given to investment real estate with scant advice on how to protect a personal residence. If you are fortunate to live in a state that offers a high homestead exemption, then this is not a concern, but for everyone else the picture is less clear. Now most professionals will advise you to carry an umbrella policy and not to worry. This thinking is naïve and not representative of how insurance companies view claims – deny, deny, deny, then, pay if forced. However, this also assumes the claim is actually covered under your policy e.g., contract disputes, defaults, environmental claims and bankruptcy are just a few of the items insurance will not cover. So what can you do? Read on.
This week an individual who I met a few years ago at one of my asset protection workshops contacted me, we will refer to him as “Joe”. At that time, Joe was rolling high with his investing and did not have the inclination or time to consider asset protection planning. In fact, I think his CPA may have mentioned that entities would complicate things, so why bother if you have sufficient insurance. Fast-forward to today and Joe’s situation has taken a turn for the worse.
In the process of losing 5 properties to foreclosure, his lenders have refused to accept a short sale. Why? Because the lenders’ performed an asset search and found that Joe has 400k in equity in his personal residence. Several of Joe’s lenders told him they wanted his equity. (In case you are wondering Joe’s insurance refused to cover his deficiency judgment – so much for all that protection!) Joe called me for help! Unfortunately, I could not help Joe because the horse had left the barn, i.e., Joe was knew he was about to be sued and any asset planning would be considered fraudulent.
Joe’s problem could have easily been solved if he had taken any one of the following actions to protect the equity in his personal residence several years ago.
Home Equity Line of Credit
Joe should have applied for a home equity line of credit with a bank different from those that held his investment loans. When taking out a line of credit the lender will secure the credit line against the equity in your residence via a deed of trust. Joe could have made his home appear encumbered to the point it no longer appears attractive to an aggressive creditor.
Friendly Line of Credit
The friendly line of credit is the same as the home equity line in principal with one exception – your entity will serve as the bank. In today’s lending environment lenders are reluctant to provide more than 75% on home equity lines if at all. So, a convenient workaround involves creating an entity in Nevada that provides anonymity of control and ownership. After you create the anonymous entity, you direct your company to enter into an equity line with yourself whereupon you provide the equity in your personal residence as collateral, i.e., your entity will record a deed of trust against your residence for any amount you deem necessary to protect your equity.
The great thing about this strategy is you are in full control of the credit line so you can increase and/or release it at any time. From the aggressive creditor’s point of view you have borrowed money from a Nevada entity that holds an equity position in your home. Word to the wise, this strategy will not protect you in a lawsuit unless your entity actually loans you money.
Qualified Personal Residence Trust – “QPRT”
Just as the name implies, this trust is set up to hold your personal residence. The QPRT is mainly thought of as an estate-planning tool. It works as follows: the owner of a personal residence transfers it to a trust, but retains the right to live in the residence for a specified period of years (you can also sell your residence and buy a new one or convert the funds to cash). At the end of that period of years, the children become the owners of the residence. Thereafter, the residence will no longer be a part of the former owner’s taxable estate. An ancillary benefit missed by most attorneys is that by placing the residence in trust it is removed beyond the reach of the parent’s creditors.
These are just a few of the strategies I use to help my clients’ protect one of their most important assets from the threat of attachment. Like all planning, starting early before the hounds are at your doorstep is of upmost importance.