Welcome to part three, the final part of our series on how to protect our personal residences. In part two we discussed a couple of common protection methods. Today we will discuss here a couple more. If you would like to know more or discuss your personal situation, call us at 800-276-1430.
Equity Stripping:
Equity stripping strategies are used by debtors, as means of making properties unattractive to creditors, as well as by some lenders, looking to take advantage of homeowners facing foreclosure. Equity stripping requires that a homeowner maintain a relatively high percentage of debt against the home, keeping the equity low. Many advisors strongly recommend this strategy. A high percentage of debt on a home reduces the equity, and thus the amount that could potentially be seized by a judgment creditor. First and second mortgages, home equity lines of credit, and friendly liens are often used to strip the equity out of a personal residence.
Because mortgage interest is generally deductible to those who itemize on their federal tax return, there can also be a significant tax advantage to always keeping a mortgage on your home.
HELOC Loans:
A Home Equity Line Of Credit (HELOC), is a revolving line of credit secured by your home. Often homeowners will get a HELOC on their personal residence to remove some of the equity from their home. This line of credit may be rarely used, but as long as the homeowner retains it, it is a lien against the home. You then become the first lienholder, in essence keeping others from using a lien against you. Always have a business purpose for the loan and occasionally borrow money to keep the line of credit active and open.
Positives:
- Easy
- Inexpensive, interest due only when used
- Avoids “Due on Sale” issue
- No state filing fees or IRS tax returns
- No capital gains or mortgage interest concerns
Second Mortgages:
Some families take out a second mortgage on the home and hold the loan proceeds in a Family Limited Partnership. Using this strategy, clients will put the cash received from the home equity into a Limited Partnership, thereby protecting the home and cash from creditors. Often, the interest earned in the FLP can be sufficient to offset the interest being paid to the mortgage company. This not only increases the family’s mortgage interest deduction but can effectively strip enough of the home’s value, making the home less attractive to a judgment creditor.
Revocable Living Trust:
Although generally considered to be an estate-planning tool, a Living Trust may also provide some asset protection for your home. Because assets inside a Revocable Living Trust can be transferred at any time by the grantor, most asset protection specialists do not place much value on the protection it allows. Notwithstanding, there may be limited circumstances when it can provide narrow and limited protection if one spouse is vulnerable to lawsuits, and the home is placed in the trust of the other spouse, but only if the home is transferred well in advance of any potential lawsuit. The trust avoids probate. This trust is a state-specific document.
Positives of a Revocable Living Trust:
- Easy
- Avoids probate
- Inexpensive
- Avoids “due on sale” issue
- No state filing fees or IRS tax returns (check with your state first on this)
- No capital gains or mortgage interest concerns
Since the trust is revocable, the length of time inside the trust is important.
Protection of Assets:
As noted above, although a Living Trust generally provides little asset protection, there are times when the protection it does provide, is adequate to protect the home. For example, placing a home into the revocable living trust of a doctor’s spouse, who has a relatively low risk of a lawsuit, may protect the home from the claims of judgment creditors of the doctor. Perhaps the state’s homestead law provides partial protection (such as $25,000 in West Virginia) and the equity in the home is slightly higher than that amount. The family may feel adequately secure and place the home inside the Living Trust. To do that, the home would be re-titled in the name of the trust and listed on the Schedule A of the trust; either as separate property of the least vulnerable spouse.
If you would like to discuss different ways to protect your personal residence, give us a call at 800-276-1430. There is no substitute for properly applied knowledge. To learn more, take a look at the following:
- Webinar: https://attendee.gotowebinar.com/recording/7179475984889590287
- 3-day Asset Protection & Wealth Creation Summits
- Ongoing webinar series
- The Total Asset Protection Handbook
