Imagine this: You’re a successful real estate investor, and then one day, you’re hit with a lawsuit. Before you know it, lawyers are dragging you to court to take your assets. And if they see you have a lot of equity in your properties, they can force you to sell all of them just to cover your settlement.
Equity stripping can prevent that nightmare scenario from becoming a reality. This advanced asset protection strategy removes your equity in a property without preventing you from renting, selling, or living in it.
What Is Equity Stripping?
Equity stripping is the process of taking out strategic liens against properties that you own. This creates the appearance of a high debt and low net value ratio. When a lawyer does an asset search on an equity-stripped property, they’ll see that you have little equity in the property. Low equity makes you a less appealing lawsuit target and lessens the likelihood that you’ll get sued.
Real-World Examples of How Equity Stripping Can Protect You from Lawsuits
Meet Sarah, a California real estate investor with about $2.7 million in equity spread across three properties. A tenant slipped and fell at one of her properties. That tenant’s attorney, who worked on contingency, did a quick asset search and found Sarah’s substantial real estate equity. Of course, that lawyer took the case, leaving Sarah to deal with a long, painful, and expensive lawsuit.
Now, contrast Sarah’s situation with Mike’s. Mike worked with our firm, Asset Protection Planners, to strip the equity from his properties. When a similar lawsuit came his way, the attorney took one look at the public record and found that Mike only had 10% equity in his properties. That’s barely enough to cover the real estate commission and closing costs. Needless to say, the lawyer didn’t take the case, since they wouldn’t have been able to extract any money from Mike. Ultimately, the plaintiff took a settlement within Mike’s insurance limits, leaving Mike’s properties and peace of mind intact.
Clearly, Mike had a better experience than Sarah. By equity stripping his properties, he was able to make himself a less enticing target for a contingency-fee lawyer. Sarah, on the other hand, left her equity where everyone could see, and got sued
How Our Equity Stripping Process Works
Now that you know what equity stripping does and have seen real-life examples of its efficacy, let’s dig into how we carry out an equity strip:
1. Create a land trust for privacy
First, we set up a land trust that will “own” your property. Land trusts allow you to hold a property title without putting your name in the public records. These structures appear on the deed as the property owner when people search county records. Putting your property in a land trust is tax neutral and does not impact your ability to use or rent it.
2. Set up an LLC for protection
Next, we create a limited liability company (LLC). In the case of investment properties, we typically make the LLC a beneficiary of the land trust. This setup shields your personal assets from liabilities tied to the property. If someone sues because of something that happens on the property, the lawsuit’s impact won’t easily reach past the LLC.
3. Record strategic liens against the property
Now comes the equity stripping. We record a lien against the property—usually about 90% of its value—using a separate offshore LLC. If someone does an asset search, they’ll see a heavily mortgaged property, rather than one with significant equity. Often, this deters lawyers and plaintiffs in search of an easy payday.
Personal Residences: A Slightly Different Approach
The above steps are used for rental properties. Primary residences require a slightly different but largely similar process.
When it comes to your home, we still use a land trust to keep things private, but we avoid making the trust beneficiary an LLC. Doing so would interfere with tax benefits like mortgage interest deductions, homestead exemptions, and most importantly, your ability to exclude up to $500,000 in capital gains from taxes when you sell your home if you’re married filing jointly ($250,000 if single).
Instead of establishing an LLC, we immediately record an equity line of credit mortgage lien. This lien is usually payable to a Wyoming LLC or an offshore LLC. This allows you to keep your primary residence’s tax benefits while still obscuring your equity in the property.
Why Offshore LLCs and Trusts Make the Difference
Equity stripping is effective on its own, but it works best when combined with offshore trusts and LLCs, especially those in the Cook Islands. Here’s why:
- Cook Islands trusts operate under laws that are extremely beneficial to trust settlors.
- U.S. courts can’t force a trustee in the Cook Islands to comply with judgments.
- Your offshore LLC (within your trust) holds the liens on your properties, putting them beyond the reach of creditors.
The Secret Weapon: Monetizing the Liens
Want to make your protection even stronger? Monetize your lien. We work with third-party lenders who can purchase mortgage liens. The proceeds from the mortgage go into your offshore asset protection trust, beyond the reach of the courts. This process transforms your equity into offshore liquidity and legitimizes your equity stripping asset protection plan in the eyes of courts and financial institutions.
Stop Lawsuits from Happening. Call Asset Protection Planners for Equity Stripping Services Today
Equity stripping asset protection isn’t some arcane strategy; it’s a time-tested method that can help you keep what you’ve worked so hard to build. And with help from the seasoned pros at Asset Protection Planners, you can enjoy the privacy and security equity stripping offers. Plus, our unique strategy of combining equity stripping with offshore trusts and LLCs ensures that any equity you regain goes where no creditors can touch it!
If you’re serious about protecting your wealth, reach out to Asset Protection Planners. We’ve helped protect assets using equity stripping for over 30 years, and can do the same for you!
