Protecting your home from the risk of a lawsuit

For those who own a home, this is probably the largest source of net worth, and with the housing market fluctuating as it is now, protecting this asset is critical. There are ways to protect your home from the risk of a lawsuit, and this article is about the vehicles that can be used.

Exceptional Considerations

A residence has certain exceptional legal qualities that are unlike any other type of property. To protect the home from liability threats, several crucial factors must be considered.

Continuous enjoyment

A properly written asset protection plan will allow you to continue living in your home.

Property protection

Some states have homeowners protection and you must find out if your home is protected by this law. Each state waives a certain amount of equity in your home from judgment. In New York, the total amount that can be protected is $ 165,550 for a single property and $ 331,100 for a joint property. In California, the amount is $ 75,000 for a single and $ 100,000 for a joint property. Massachusetts allows $ 500,000. Eight states 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, then no further asset protection is needed. If not, you should consider other avenues.

What plans don’t work

If you place the residence in a limited family partnership or limited liability company, the IRS has ruled that some or all of the tax advantages may be lost. Also, if a property is placed in an FLP and reserved for personal use, the protection offered by the FLP could 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 amount of the family property while retaining tax benefits and the continuing right to use and enjoy the home.

The best type of trust for this type of asset protection is the grantor trust. In this case, the trust is not the owner of the property. The trust should be respected for protection purposes but ignored for taxes.

After solving the tax problems, the next step is the actual protection of the assets. It is important to remember that you, as the owner, cannot maintain the full spectrum of property rights. If you do, a judge will likely order you to turn over the property to a plaintiff. Therefore, the key is to keep full and complete ownership of your home to something less. There are some alternatives to this situation that can protect your home.

Personal residence trust

A personal residence trust is a generic term for a trust to maintain property and employ restrictions that protect against possible losses. This type of trust is considered ignored for tax purposes, so no tax problems are formed and tax benefits are protected. There are many different designs and strategies that can be used to build this type of trust, depending on the specific circumstances of the case.

An alternative is to allow the PRT to allow your children or other family members to take possession of the home after a certain number of years. The trust gives you the right to live in the home for a period of 10 to 20 years. Depending on the terms of the trust, there can be excellent tax benefits to freezing the home’s value at its current amount and thus removing it from your taxable estate. The number of years and other important terms can be modified to suit specific circumstances.

Another alternative is to allow the trust to own the home and lease it back to you for a certain number of years. In the case, you will pay the rent to the trust and the normal tax benefits still apply because the rules of the granting trust. At the end of the lease term, full ownership returns to you or is transferred to your children.

In a slightly different version, the PRT might have the opportunity to purchase or the right to exercise some other right to the property within the trust. As an example, the Personal Residence Trust is created which grants the trust an option to purchase the property for the loan amount, at any time within the next 15 years. The option agreement is recorded and acts like a bond on the property. A successful plaintiff cannot garnish the home equity, as the home itself is subject to the purchase option for the amount of the home loan. Under this agreement, you can live in the house without restrictions and subject only to the terms that are provided 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 ​​the direction planning can take.

Resume

Protecting your family’s home from the risk of lawsuits requires consideration of income tax and local property tax issues, as well as your state’s property law. A Personal Residence Trust can provide a good resolution for many of the complex problems that often arise when it comes to a home. If you think you have a potential degree of exposure to lawsuits or have substantial equity in your home, then you should consider some of the strategies discussed in this article. You should contact an experienced asset protection attorney to make sure your trust is drafted correctly.

In another article I will address the concept of dispossession of shares.