Real estate asset protection strategies. How to protect your home and investment property. Described below is an asset protection strategy for real estate. As you will see, each element of the plan protects your assets, provides privacy and/or is a deterrent for a legal opponent. In addition, we have viable strategies on this website that secure liquid assets. Please watch the video below and then read the description of each of the strategies.
Video: Real Estate Asset Protection for Personal Residence and Income Properties – From our affiliated brand, Companies Incorporated
The first element of this asset protection strategy is privacy of ownership. To accomplish this we establish a land trust for each property. You are the beneficiary of the trust, or you control the LLC that is the trust beneficiary. As such, you can sell, rent or refinance the property as you wish. Thus, you essentially have as much control as if the property was in your own name.
The land trust holds title to the property. So, first, we draft the land trust. Then we draft the deed that you use to transfer the property into land trust. You keep the land trust, thus the name of its beneficiary, in your filing cabinet at home. You record the deed in the county recorder’s office in the county where the property is located. The deed is the document that transfers the property from its current owner, you for example, to your trust.
Again, the first thing you gain here is privacy. That is, the property is titled to a trust, not you. Why do we do this? Here is the answer. Before a law firm makes a plan to pursue an individual, they usually run an asset check to see what is within reach. This is as simple as searching public records to see what you own. Thus, with your property titled to properly drafted land trusts, your name won’t come up in a routine asset search.
So, we have addressed privacy of ownership through the use of land trusts. Next, we address asset protection and limiting internal liability. That is, liability your asset creates. We do this by establishing limited liability companies, that is, we file LLCs. For instance, a tenant or guest slips and falls. A loose wire causes a fire that injures someone. Someone trips on a loose carpet. Someone walking by who needs money intentionally injures themselves on your property. To protect yourself, the LLC is the most common candidate.
So, we make the LLC the beneficiary of the land trust holding the title to your investment property. Here we gain lawsuit and asset protection as well as tax and estate planning benefits. For tax purposes, for your personal residence, you will usually maintain the beneficiary position yourself, and not utilize a company. So, we use a land trust plus LLC for income property. We use a land trust alone for your personal residence.
One final measure that acts as a powerful deterrent to creditors is to set up a separate LLC and have it mortgage the equity in your investment property. This is a publicly recorded equity line of credit type of mortgage or deed of trust recorded in the county recorder’s office against each property. Doing this strips the equity out of your properties.
Then, when the “bad thing” happens and you are in legal hot water we transition to phase two. Have you ever gotten a letter from a bank saying, in effect, “We just bought your mortgage so start making monthly payments to us now?” It is very common to have one bank buy a mortgage from another bank.
So, here is what we do. We first establish an offshore trust that is beyond the reach of the local courts. We have a lender offshore that will buy the mortgage and place the proceeds into your offshore trust. Thus, you have a statement that you can show the judge that shows that a third party purchased the mortgage and that the proceeds are held in your trust.
Naturally, you would not be able to scoop up the money and run. That would be too risky for the lender. But, keep in mind, before doing this strategy you were not able to spend the equity in your property, either. After all, it’s just equity. You can, however, generate spendable cash if you sell or refinance the property. Doing so will pay off the mortgage and generate liquid cash in your offshore trust that you can access as you wish.
The structure continues to grow in detail here with some estate planning tools. We establish a living trust. Then we take the beneficiary entities, such as LLCs, and put them into the living trust. This allows you to specify exactly who or what receives your assets upon death. It can also reduce your probate costs and could substantially reduce estate taxes. At this point, you have placed your investment property into land trusts. The beneficiary is a legal entity, such as an LLC. A living trust owns your LLCs. You have privacy, internal liability protection, lawsuit protection and estate planning all bundled into your asset protection strategy.
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 average home in California will be worth more than the average one in Iowa. Ideally, you want one LLC per property. With this arrangement, it helps to prevent one lawsuit from taking all of your real estate. Thus, you have each property protected in its own separate cubbyhole.
In general, you may want to limit the amount of equity per legal entity to around $200,000 or so. Typically, we will put each investment property into a separate land trust. Then, a separate LLC owns each land trust. The land trust gives privacy of ownership. The LLC provides asset protection. When someone sues LLC owners personally, there are provisions to prevent creditors from taking the LLC or anything inside of it. The LLC also acts as a lawsuit shield. When someone gets hurt on the property and sues for more than your insurance covers, it can keep the lawsuit within the LLC and away from you, personally.
The Garn St. Germain Depository Institutions Act of 1982 says, in short, that you can transfer one to four dwelling units into a trust without the bank calling the loan due. There are a few more details but we have never seen a lender invoke the due-on-sale clause when someone has placed a house into one of our land trusts. So if you have a personal residence, four rental homes and three fourplexes, each can go into separate land trusts. If you read the above law, you will see that you do not need to get permission from the lender to do so. It is recommended that you advise your insurance company.
Using the right tools mitigates your liability. For a legal opponent planning to pursue your assets, you have placed multiple roadblocks. You have hidden, protected and stripped the property of its value. And in the end, there isn’t a prize for the hungry predator looking to you for his or her next meal. You have also created an estate plan for yourself and your loved ones.
To learn more or to establish a real estate asset protection strategy, there are telephone numbers and an inquiry form on this page to discuss your needs. The sooner you get started, the better it will be for you when the process server shows up at your door.