In many cases, a person’s most valuable asset is their home or other real estate. So, it stands to reason that people want to keep their property safe from lawsuits and other threats. That’s why a real estate asset protection strategy is a must.
In this article, we’ll explain the basics of real estate asset protection strategies so you can feel confident establishing one with the help of a professional:
- How Much Protection Do You Need to Defend Your Real Estate Assets?
- The Basics of Real Estate Asset Protection Strategy
- 4 Tools Used in Real Estate Asset Protection Strategies
The Basics of Real Estate Asset Protection Strategy
Real estate asset protection strategies are plans crafted by wealth defense specialists to keep real estate safe from judgments, creditors, and other financial threats. These plans use multiple methods of asset protection, such as land trusts, corporate structures, and equity stripping. When these tools are used together, they can effectively protect your home and investment properties you may own.
Like all asset protection strategies, a real estate defense plan works best when it is crafted long before any legal threats arise. Designing and activating these plans takes time. If you set one up in the middle of a lawsuit, it won’t be ready when you need it. However, if you establish your real estate asset protection plan prior to legal action, it can keep your real estate holdings safe and secure.
Finally, it’s worth noting that a real estate asset protection strategy will look different depending on the type of property being protected. Specifically, rental and income properties require a slightly different strategy from personal residences. If you work with an asset protection planner, they can help you choose the best method for the corresponding property type.
Video: Real Estate Asset Protection for Personal Residence and Income Properties
4 Tools Used in Real Estate Asset Protection Strategies
When we create a real estate asset protection strategy, we don’t rely on any single wealth defense tool. Instead, we create a multi-layered strategy that can defend your property from various threats. The four main layers of our strategies include:
1. Privacy of Ownership (Land Trust)
The first element of any asset protection strategy is privacy of ownership. Essentially, you don’t want your name to be associated with the real estate you own because you want creditors to believe you have nothing to take.
To make your holdings private, we establish a land trust for each property you own. As such, we can make you the beneficiary of the trust(s). Once the land trust is established, it appears as the owner of your property. So, when a creditor does an asset search, they won’t find your name associated with the real estate holdings and will often look for a more appealing target.
As the beneficiary of the land trust, you can still rent, refinance, or sell the property if you wish. For investment property, we usually set up a limited liability company (LLC), which you control, to serve as the beneficiary of the land trust. This strategy further separates your name from the property title without forcing you to relinquish any control over your real estate.
2. Asset & Liability Protection (Limited Liability Companies)
After you hide ownership of real estate using land trusts, it’s time to add layers of asset protection and limit internal liability; that is, the liability your asset creates. We do this by establishing LLCs for your properties.
The reason we do this is simple. LLCs create another barrier between you and any liability created by your assets. Here’s an example of how this works: Imagine you own a rental property, and one of your tenants slips and injures their leg. That tenant then turns around and attempts to sue you. If you don’t have an LLC in place, their lawyer could go after your personal assets. However, if your LLC owns the property, your tenant’s lawyer will often have to settle for seizing the assets owned by the LLC.
When establishing an LLC for this purpose, we make the LLC the beneficiary of the land trust holding the title to your investment property. This provides lawsuit and asset protection, as well as tax and estate planning benefits. Keep in mind that this strategy is primarily for rental properties, not your personal residence. Placing your primary residence under an LLC may cause you to forfeit certain tax benefits associated with owning a home. Our tax advisors recommend using only a land trust for your personal residence and skipping the LLC.
3. Equity Stripping
One final measure that acts as a powerful deterrent to creditors is to strip the equity from your properties. This acts as a failsafe when a keen-eyed lawyer notices that you have ties to the land trusts and LLCs that own your investment properties.
An equity strip occurs in two major phases. During the first phase, we set up a separate LLC. Then we have it record a mortgage against the equity in your investment property. This is a publicly recorded equity line of credit mortgage (or deed of trust) recorded in the county recorder’s office against each property to strip out the equity.
When you end up in legal trouble, we transition to the second phase of the equity strip. We first establish an offshore trust that is beyond the reach of local courts. Then, we have a lender buy the mortgage from your LLC and place the proceeds into your offshore trust. This creates a paper trail, which a judge can view, showing that a third party purchased your mortgage and placed the proceeds in your offshore trust.
Now, this strategy can seem a bit complex at first, but it is a lot easier than losing the property. That is why you hire experienced professionals. Here’s a real-world example of how equity stripping protects real estate holdings:
In the California Ninth Circuit case, Nautilus, Inc. v. Yang (2017) 11 Cal.App 5th 33, 35-37, the plaintiff Nautilus, Inc. (“Nautilus”) got a judgment against a defendant by the name of Stanley Kuo Hua Yang (“Yang”). Nautilus attached the judgment to a home that Yang owned. The family had a mortgage recorded against the house. Another company, in turn, bought the mortgage from the first lender. As a result, Nautilus filed suit against Yang, Yang’s father who took the title and helped his son get the loan, the original mortgagee, and the company that bought the mortgage. So, what happened? The lower court ruled that the one who recorded the mortgage and the lender who bought it acted in good faith. The California Supreme Court also affirmed this ruling, citing Civil Code section 3439.08(a). The liens held firm and could not be invalidated.
The above example shows that recording a mortgage against your home does remove your equity from it, even if you still reside in the house. As you don’t have any personal equity in the property, a creditor cannot readily lay claim to it.
4. Estate Planning (Living Trusts)
To complete your real estate asset protection strategy, we incorporate essential estate planning tools—most notably, a revocable living trust.
We don’t just form the trust; we strategically integrate it into your asset protection structure. Rather than placing your LLCs directly into the living trust—which can jeopardize your legal protection—we add a succession clause to each LLC’s operating agreement. This clause ensures that, upon your passing, ownership of the LLC seamlessly transfers to your living trust.
Why do we do it this way? Because while you’re alive, an LLC owned outright by your living trust can become vulnerable. In a personal lawsuit, a judge may order you to alter the trust’s beneficiary, potentially handing control of your LLC—and the assets it holds—to your legal adversary. By contrast, our approach preserves charging order protectionduring your lifetime while ensuringsmooth, probate-free asset transfer after death.
Here’s what you now have in place:
- Your properties are held in land trusts.
- The beneficiary of each land trust that holds rental property is an LLC, protecting equity and limiting liability.
- Each LLC includes a provision to transfer ownership to your living trust upon your death.
- Your living trustserves as the estate planning layer that ensures your assets are distributed according to your wishes—privately, efficiently, and without probate.
In short, you now enjoy privacy, lawsuit protection, internal liability shielding, and estate planning benefits—all working together in a cohesive, bulletproof asset protection plan.
How Much Protection Do You Need to Defend Your Real Estate Assets?
One of the most common questions we answer is, “How many legal entities do I need?” It depends on how much each property is worth. The more valuable your property, the more legal entities you need to fully protect its value.
In general, you want to limit the amount of equity per legal entity to around $200,000. To avoid overleveraging any single legal entity, we put each investment property into a separate land trust. Then, a separate LLC is the beneficiary of each land trust. The land trust gives privacy of ownership, while the LLC provides lawsuit protection and asset protection.
Call Asset Protection Planners to Craft a Custom Real Estate Asset Protection Plan
As you can see, using the right real estate asset protection tools keeps your wealth safe from creditors, lawyers, and other financial threats. Deployed properly, these strategies can place insurmountable roadblocks between your assets and anyone who wants to take them from you.
To gain the strongest level of protection possible, however, you need to work with a professional. Luckily, Asset Protection Planners has spent decades crafting ironclad real estate asset protection strategies using the best tools possible. We’re confident that with our expertise and experience, we can help you create a custom strategy that will keep your real estate safe from major threats.
To learn more or to establish a real estate asset protection strategy, fill out the form below to schedule a consultation with one of our team members.
