For those who own a home, it is likely the largest source of net worth, and with the housing market as volatile as it is right now, protecting this asset is crucial. There are ways to protect your home from the risk of lawsuits, and this article discusses those compounds that can be used.
Housing has exceptional legal qualities unlike any other type of property. To protect a home from liability threats several critical factors must be considered.
A properly drafted Asset Protection Plan will allow you to continue living in your home.
Some states have home protection and you should find out if your home is protected under this law. Each state exempts from the provision a certain amount of equity in your home. In New York, the total amount that can be protected is $165,550 for a sole proprietorship and $331,100 for a joint property. In California, the amount is $75,000 for a sole proprietorship and $100,000 for a joint ownership. Massachusetts allows $500,000. Eight countries allow unlimited protection. New Jersey and Pennsylvania have no protection. If the equity in your home is less than the amounts allowed in your state, there is no need for further asset protection. Otherwise, you should consider other methods.
Plans that don’t work
If you put the residence into a family limited partnership or limited liability company, the IRS has ruled that you lose some or all of your tax benefits. In addition, if property is placed in an FLP and is reserved for personal use, the protection provided by the FLP may be challenged in a future lawsuit.
Solve the protection problem
The key in this scenario is to protect the equity in a home above the dwelling amount while retaining the tax benefits and continuing right to use and enjoy the home.
The best type of trust for this type of asset protection is a grantor trust. In this case, the trust is not the owner of the property. Trusts should be respected for protection purposes but ignored for tax purposes.
After the tax issues are resolved, the next step is to protect the actual assets. It is important to remember that as the owner you cannot hold the entire set of property rights. If you do, the judge will likely order that the property be turned over to the plaintiff. Therefore, the key is to keep your home ownership from complete and complete to something less. There are several alternatives to this situation that can protect your home.
Confidence in personal residence
“Personal Residence Trust” is a generic term applied to a trust for holding property and employing restrictions that protect it from potential loss. This type of trust is ignored for tax purposes so that no tax issues are formed and tax benefits are protected. There are many different designs and strategies that can be used to create this type of trust, depending on the specific circumstances of the case.
One alternative is to allow a PRT so that your children or other family members can own the home after a certain number of years. The Trust allows you the right to live in the home for 10 to 20 years. Depending on the terms of the trust, there can be excellent tax benefits by freezing the value of the home at its current amount and thus removing it from your taxable estate. The number of years and other important terms can be modified to meet specific circumstances.
Another alternative is to let the trust own the home and lease it back to you for a certain number of years. In this case, you’ll pay rent to the trust and the normal tax benefits will still apply because of the grantor’s trust rules. At the end of the lease term, full ownership reverts to you or passes to your children.
In a slightly different version, the PRT could be given an opportunity to purchase or the right to exercise some other rights over the property within the trust. For example, a Personal Residence Trust was created that gives the trust an option to purchase the property for the loan amount, at any time within the next 15 years. The option agreement is registered and acts like a lien on the property. A successful claimant cannot take possession of the equity in the home, because the home itself is subject to a purchase option against the loan amount on the home. Under this agreement, you may live in the home without restrictions and subject only to any terms set forth in the option agreement. There are a number of issues that need to be addressed in this type of strategy but this example gives you an idea of where the planning can go.
Protecting a family home from the risk of lawsuits entails consideration of local income tax and property tax issues in addition to your state law. A personal residence fund may provide a good solution to many of the complex issues that usually arise when dealing with a home. If you feel that you have a potential degree of exposure to a lawsuit or have a large stake in your home, you should consider some of the strategies discussed in this article. You should contact an experienced asset protection attorney to ensure that your trust is properly worded.
In another article I will address the concept of stock stripping.