For many people, your home is the single largest investment you will make. You will notice I did not use the word ‘asset’ because I consider a home to be a liability. Assets make you money, liabilities cost you money. Nevertheless, it is a large investment and one you certainly want to protect from the parasites that seem to persist and thrive in today’s world.
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 larger or all-inclusive homestead exemption, this is not a concern. For everyone else the picture is less clear.
Most attorneys and insurance agents 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.
Of course the assumption here is that the claim you now face is covered under your policy. For example, contract disputes, defaults, environmental claims and bankruptcy are just a few of the items insurance will not cover. What to do, you may ask…
Last week I received a call from a woman in California. Let’s call her Susan. Susan owned several rental properties in the Southern CA region and due to the housing crisis; she is upside down in all of her houses, except one – her residence.
To be clear here, I am not trying to justify her financial acumen or skill as an investor, only using this as an example for the sake of the rest of you who may want to consider asset protection planning as it relates to your home. Susan had refinanced her investment properties over the past 3 years to pull cash out to satisfy some unrelated debt leaving here with very little equity in the houses.
Of course as we are all well aware, housing prices plummeted over the past 3 years leaving her with negative equity in all properties, except her personal residence. Susan was trying to renegotiate with her lenders to reevaluate the terms of the mortgage and in some cases short sale the properties.
Once the lenders discovered through their own due diligence that Susan had significant equity in her personal residence, the banks shut the door on negotiations. They are pursuing her personally for deficiency judgments and seeking foreclosure of her home to satisfy them.
As you can imagine, the umbrella policy her attorney and insurance agent recommended offer no comfort at this time. Now Susan is looking at foreclosure of all properties, including her home.
I would love to say we solved her problem and found a way for her to keep her home, but alas, it was too late. She missed the boat. You don’t buy car insurance at the scene of the accident.
Susan’s problem could have easily been solved if she had taken any one of the following actions to protect the equity in her personal residence several years ago.
Home Equity Line of Credit –
Susan could have applied for a home equity line of credit with a bank different from those that held her investment loans. When taking out a line of credit the lender would secure the credit line against the equity in the residence via a deed of trust. She could have made her home appear encumbered making it unattractive to an aggressive creditor.
Friendly Line of Credit (also called Equity Stripping) –
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 LLC 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.
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. At the end of that time period, the heirs 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 homeowner’s creditors.
These are just a few of the strategies I use to help my clients’ protect one of their most important investments from the threat of attachment. Like all planning, starting early before the hounds are at your doorstep is of utmost importance.
Call today for your free 30 minute consultation. Until next week, live well.