Asset Protection of a Primary Residence
Protecting your family home or primary residence, a leading source of equity and a readily available asset, is a leading concern for many of our clients. A simple domestic asset protection strategy for this purpose can be accomplished by using a combination of legal structures. The first component to this is a land trust. In this case, the title to the property will be in the name of your trust. This provides privacy of ownership for the owner of the property. When a legal opponent performs a real estate search in the public records search your name will not appear. With this type of trust, you, as the beneficiary, control the trust. This gives you control over the asset. The beneficiary is often an individual, or a living trust, the third component here.
A land trust is essentially a private agreement, whereby one party (the "trustee"), agrees to hold title to property for the benefit of another party or parties (the "beneficiary(s)"). The creator of the trust (often called the "settler" or "trustor") is the original titleholder to the property and often remains the beneficiary of the trust for his/her lifetime. The trustee holds the title to the property and must follow the instructions of the beneficiary. The beneficiary has the absolute right to direct and control the trustee, and receive all income from the trust. The trustee has no more power than the beneficiary gives him/her, and has no function other than to do what the beneficiary directs them. This type of land trusts is revocable, and may be changed, modified, or terminated while the trustor is still alive. An uncooperative trustee may be removed.
Next, by forming an LLC, you can record a loan against your property. This is accomplished by having us draft both a note and deed of trust, or a note and mortgage and recording it against the property. We make the note payable to your LLC. By doing this, a public records search reveals that you have little or no equity in the property. This act alone can discourage litigation. The lien can be removed by you at any time.
The third element here is a living trust, which acts as a serving tray containing the two other components discussed in this asset protection strategy. This allows your assets to be passed to beneficiaries (children, family members) avoiding probate fees and can possibly reducing estate taxes.
How It Works
Litigators are not generally interested in suing people who have no assets. One of the easiest ways to determine whether or not someone is a good target is to search the public records for real estate holdings. A land trust is a powerful privacy tool to ensure that a litigator's search for deep pockets comes up empty, a key to this asset protection strategy.
First, a land trust is a privacy device, and not a corporate entity. Accordingly, land trusts cannot extend the liability protections that business structures offer. If someone slips and falls on the property, the beneficiary can be held liable. That is why we establish a Corporation, LLC or LP to stand in as beneficiary for investment property. When this is done, your plan starts to offer additional personal protection from liability. For your primary residence, because this is a different tax category, you will remain as beneficiary so you can retain your interest deductions and save money on taxes from sales proceeds.
Second, the transfer of property into a land trust can often be accomplished tax-free. The internal revenue code provides that the federal government will treat the property as if it was owned outright by the beneficiary. See I.R.C. ¤¤ 671-678. In addition, in nearly all states, the transfer of property by a beneficiary to a revocable trust does not require the payment of any transfer or recording taxes.
Your assets are placed into vehicles that you control. When structured and established properly, provides maximum financial privacy and puts the liability into a separate entity, while removing the title of the assets from your name.
This is a recommended strategy for your primary residence. It is our policy to conduct a complete consultation with all of our clients providing an educational and informative session so that you can make a confident decision. Our representatives are available during business hours Pacific Time.