For most people, our homes are our: safe space; our refuge; our abode of comfort, peace, and love. It is where we get away from the world. Our most asked question on our hotline is: “how do I protect my personal residence?” We will spend the next couple of weeks discussing this.
Let’s consider a few of our primary concerns:
- Mortgage interest deduction
- Capital gains exclusion
- “Due on sale” clause
- Real estate transfer fees
- Property tax reassessment
- Tax filing requirements
- Homeowners insurance
What are the solutions? Solutions are almost always caused by the case, or in another’s words, “it depends.” Each solution can bring some problems or challenges so always consider your endgame.
Let’s take a look at some ideas of Problematic and Common solutions:
Problematic Protection Methods
- Business Entities
- Friendly Liens
- Land Trusts
Let’s discuss some of the problematic solutions here.
- Business Entities:
LLC’s, Limited Partnerships, and Corporations can be used, sometimes effectively. However, we are not running a business, we are trying to put a family-owned asset or a personal asset into a business entity. In the event of a personal lawsuit, a plaintiff’s attorney could argue that you have no business purpose for your personal residence in the entity, so your home might not be protected.
- Friendly Liens:
Friendly Liens are simply a lien against a property that you own that is held by a party-friendly to you. Friendly liens are often placed by the homeowner themselves, through an out-of-state business entity they control. A line of credit could be established between the homeowner(s) and the business without an actual transfer of funds. This can be an effective asset protection tool because judgment creditors who come along after the lien has been placed will be in a junior position to the lienholder.
To be effective, the lien must be properly recorded, so that the world has notice of the lien. A quick search on the property would show there is little or no equity in the property, thus making it an unattractive asset for inquiring searchers.
The concern is that there is rarely equal and adequate consideration given, thus the lien becomes simply an unenforceable smokescreen. It is effective only if it is undetected. If it is detected, it can serve to work against the homeowner as an indication of fraudulent activities. Friendly liens with the intent to defraud the IRS are clearly illegal. That said, friendly liens are often used by some of America’s best asset protection advisors and attorneys.
- Land Trusts:
The Land Trust is a trust in which real estate is conveyed to a trustee under an agreement that preserves full management and control of the property with the beneficiaries.
The trustee executes deeds and mortgages, and otherwise deals with the property, at the written direction of the beneficiaries. The beneficiaries may improve and operate the property, and exercise all rights of ownership other than holding or dealing with the legal title.
Usually, two instruments create the arrangement, a trust agreement and a deed in trust. The deed-in-trust conveys the realty to the trustee. In the trust agreement, while legal title to the real estate is held by the trustee, the beneficiaries retain the power of direction to deal with the title, to manage and control the property, and to receive proceeds from sales or mortgages from the property. The trustee agrees to deal with the property only upon the written direction of the beneficiaries or the persons named as having the power of direction.
As this arrangement shows, Land Trusts can be very good at providing anonymous ownership of the real estate. However, a land trust provides very little real asset protection beyond this hiding of ownership.
In the next article, we will discuss primary concerns and common protection methods. If you have not already registered for our upcoming, exciting 3-day Asset Protection & Wealth Creation Summit, please do so on our website at www.protectwealth.com or give us a call on our hotline at 800-276-1430.