For most of us, protecting our home is paramount. We do this through the acquisition of homeowners insurance, fire insurance, flood insurance, personal liability insurance, burglar alarms, fire alarms, frightening dogs, and an assortment of high powered weapons. In addition to all the above, you should consider legal asset protection planning for your home.
I have a client who works in a high risk occupation. My client has a recurring nightmare that he will incur serious personal liability and have a sheriff come to his house with a judgment in hand, kick his family out, and attempt to take furnishings or other personal items from the house to satisfy the judgment. He wants to be sure that his wife and children don’t experience this kind of invasion of their peace, privacy and personal belongings, but what are his options?
These are a few of the common strategies for protecting a home:
Using Mortgages and Liens
Some people keep enough debt on the home so there isn’t much equity for a creditor to attack. A lack of equity may deter a creditor, but it results in a significant interest expense Others sign up for a home equity loan that results in a lien for the full amount of the credit line even if they don’t borrow any money. This gives the appearance of low equity, but it is only a smokescreen It may deter a lazy creditor, but it also may fail if a creditor discovers that no funds have been borrowed and there is equity in the home.
Separate Property Ownership for a Safer Spouse
If a couple has a safer spouse who is not likely to be sued, it is possible for the couple to sign a legal agreement whereby they agree to own property separately. If the couple has signed a prenuptial agreement, or a post-marital separate property agreement, the creditors of one spouse should not be able to reach the separate property of the other spouse (see Lakeside Lumber Products vs. Evans under “Important Articles, Cases and Rulings” on my website). This can be a safe and convenient strategy, and it allows a couple to retain all the tax advantages of home ownership. The only disadvantages are the risk of a suit against the safer spouse, and the risk in some states that you could be left at a disadvantage in the event of a divorce.
Using an Irrevocable Trust
The advantages of transferring a home to an irrevocable trust are: (1) the assets can be protected from the creditors of both spouses, (2) the couple can retain the tax advantages of home ownership, (3) the trust can serve other important purposes such as avoiding probate, avoiding estate taxes, and transferring assets to heirs according to your wishes. The disadvantages of an irrevocable trust include: (1) cost and complexity, (2) possible difficulty in later refinancing the home, and (3) the transfer must occur far before trouble occurs so it is not deemed to be a fraudulent transfer.
Renting from a Safer Entity
If you don’t own something, your creditors can’t take it away from you. I have some clients who rent their furnished house from a friendly landlord to ensure that the assets are protected from creditors. The obvious risk is that the landlord could kick you out, or he could jeopardize the home due to his own liabilities. It is best to structure a protected entity to own the home and collect rent from you for your future benefit. By paying full rental value for your home and personal property, you can transfer additional funds into a protected entity This option requires some cost, complexity, and tax planning, but if properly designed and managed, it can provide phenomenal peace of mind.