Protect Your Pad
We unfortunately live in a very litigious society and many of us have been affected by a lawsuit threatening our assets. Of all my assets, I am very attached to my home and the memories my family and I have made there. Ironically, protecting your home from creditors and lawsuits is particularly difficult because of the nature of the asset. Below are some of the methods that can be used, which you would want to discuss further with an attorney to see what strategy would be best for you.
1. Liability Insurance – I recommend purchasing as much liability insurance you can afford. A large umbrella policy could just possibility be enough to settle a creditor’s claim.
2. LLCs – These entities are useful for many to protect their assets, but you need to be sure to have a business purpose when you fund a personal residence into an LLC. It may also cause you to loose certain tax benefits.
3. Qualified Personal Residence Trust – The QPRT has been long used as a way of transferring a personal residence to children with little or no transfer taxes. However, it is also a valuable way to protect your home from creditors. Under this arrangement, you are allowed to transfer a personal residence (either your principal residence or a second home) to a trust, retain the exclusive use and control of the property for a given number of years, and then have the value of the property pass to your children. If you die before the value of the property passes to the children, the trust terminates and the property is returned to you (your estate). If you get sued, the issue is whether the creditor can take your retained interest and force a sale of the home. If that were to occur, the Trustee of the QPRT must pay you annuity payments for the rest of the Trust term and the creditor could go after these payments.
4. LLC Owned the Retained Interest – After forming and funding the QPRT, you would form an LLC and assign your retained interest in the home to an LLC. If the LLC is owned by the same individual(s) who owned the house originally there are no adverse tax consequences. However, if the home is sold by the Trustee of the QPRT and proceeds are not used to purchase another home, the Trustee must make annuity payments to the LLC and those payments may get trapped inside the LLC if a creditor goes after the payments.
5. Domestic Asset Protection Trust – Instead of you owning the LLC, one or more Domestic Assets Protection Trusts can own the LLC. A DAPT can be formed in only 13 states and the you can be the beneficiary of the DAPT. If the house is ever sold and the sales proceeds are converted to an annuity for the owner of the retained interest (i.e. the LLC) and if the LLC makes a distribution to the member of the LLC, the member of the LLC would be the DAPT and under the laws of 13 states is not subject to seizure. The home is now truly protected.
