Asset Protection for Your California Home

How do you protect your home from a lawsuit in California? Lawsuits are all too common in the Golden State. For those in high risk professions, such as doctors and lawyers, a well-crafted asset protection strategy is essential. Potential legal claims against California residents could cause homeowners to lose their homes. However, there are some laws, strategies and legal vehicles you can use.

California Homestead Exemption

Face it, California home prices are high compared to most other states. The problem is that California is only considered a partial homestead state. This means that a homeowner is eligible to exempt a portion of their home’s equity as their primary residence. The exemption refers to an inability of creditors to attach claims to the equity covered by the exemption. Under California law, homestead exemptions starting January 1, 2021 are from $300,000 to $600,000 adjusted for inflation. The minimum protection is $300,000. The maximum protection is the lower of $600,000 or the median house value in the county where the property is located. These figures are adjusted annual based on the Consumer Price Index. Since the California median house price is much higher than the national average. In San Francisco County, for example, as of this writing the median house price is $1.4 million. This leaves many homeowners out in the cold. While a homestead exemption can allow homeowners to protect some equity, it may not be effective in keeping the owner in the home.

It is essential to note that the homestead exemption can be used to protect equity from most creditors. However, certain creditors may still reach assets protected by the exemption. These creditors include federal or state governments for tax claims, as well as child support and alimony claims. Additionally, creditors who successfully obtain judgements against the homeowner may be able to force the sale of the home. After the sale of the home, they can keep all the equity from the sale which is covered by the judgement up to the amount owed by the debtor. In California, judgements last for 20 years. This means that a creditor may wait until the value of a debtor’s home appreciates to beyond whatever the exemption is. Once the value of the home exceeds the exemption, they can sell and collect the value of the leftover equity.

Qualified Personal Residence Trust

Qualified personal residence trusts (QPRT) are a form of irrevocable trust which is popular for use in estate planning and asset protection in California. Qualified personal residence trusts move a settlor’s personal residence out of their estate. They assign a low gift tax value to the residence. Both the property itself and any future appreciations are excluded from the settlor’s estate once the residence has been placed in the trust.

Thus the QPRT is a bit too restrictive for most people. This is because the qualified personal residence trusts are known as split-interest trusts. For a predetermined number of years, the settlor retains the right to live in the residence rent-free. The remainder of the interest in the residence is reserved for the beneficiaries of the trust, such as children. The interest which the settlor retains in the residence is not legally protected from the claims of creditors. However, in practice, it is extremely rare for a creditor to go after a settlor’s remaining interest. The reason for this is that it would be very difficult to sell this interest in a foreclosure sale. Qualified personal residence trusts do not apply to exemption creditors. Exemption creditors include federal and state governments for tax purposes, as well as child support and alimony claims.

Equity Stripping

Equity stripping is what many consider the best way to protect your home from a lawsuit in California. It is sometimes referred to as collateralization. Equity stripping is the process of encumbering an asset with debt in order to reduce the value of that asset. It is commonly used to take the value of a riskier asset and invest it into a safer type of asset. When used correctly, asset stripping is a perfectly legal form of asset protection. This process is commonly used by professionals in high-risk industries in order to protect their homes from lawsuits.

The most common type of equity stripping occurs when a homeowner places a large mortgage on their home. In California, this is legally referred to as a deed of trust rather than a mortgage. In doing so, the home becomes a much less attractive target for creditors. The proceeds of the mortgage may then be placed into an offshore trust. Offshore trusts are the preferred legal vehicle for protecting these proceeds because they provide the highest level of asset protection.

This does not necessarily include the use of a bank or other traditional lender. That is, you can use the combination of an offshore LLC and offshore trust. Here is step one. The offshore LLC can be used to record a home equity line of credit against the home, without any cash changing hands initially. This line of credit is in place so you can later use it to strip the home of its equity. As a result, the home will become a much less attractive for creditors looking to make claims.

Here is step two. It is a common practice for banks to acquire mortgages from one another. This practice can be used to the benefit of homeowners who wish to protect the full value of their homes from creditors. We have offshore private lenders who can acquire the mortgage from your LLC and place the proceeds in an untouchable account in your offshore trust. This will create a paper trail which identifies the payment from the home equity line of credit. The proceeds, as we have stated, are then transferred into the offshore trust. In the event of legal duress, it is possible to show the courts where the money is. This is important to avoid being accused of concealing assets. However, a US court will be unable to enforce a judgment against the funds because they are held in an offshore trust. Many of the world’s favored offshore trust jurisdictions, such as the Cook Islands and Nevis, do not recognize foreign judgments.

It is important to note that it is not preferable to put a house directly into an offshore trust. The reason is that real estate is subject to the laws of the local jurisdiction where the property resides. Even if the equity of the real estate is held in an offshore trust, it can still be affected by local judgments. As a result, it is advisable to strip the equity from the real estate. In a worst case scenario, it is far preferable to lose the real estate itself and keep the value of the real estate as liquid assets held in an offshore trust. Alternatively, homeowners in high-risk professions could potentially lose both the ability to live in the home and the value of the property.

When equity is stripped from a home, the lender is given control over the assets which it would not normally have. This control can include the ability to demand regular loan payments. Another challenge is that is your other assets are tied up during legal duress, it could be difficult to make those loan payments.

By using a private lender rather than a bank, it is possible to mitigate these issues. One way to do this is by having the private lender structure the loan repayment as one lump sum at the end of the loan’s life. This way, foreclosure can be avoided if a loan payment can’t be made as the result of a creditor’s pursuit.

It is also possible to use equity stripping for other assets in addition to real estate. Assets like securities may be included in an asset protection strategy which includes equity stripping. Equity is stripped from securities by borrowing against them on margin. The equity in a company’s accounts receivable may also be stripped. Equity stripping should be considered as an option in any well-crafted asset protection strategy.

Conclusion: Protect Your Home from a Lawsuit in California

It is becoming more and more important to have a solid asset protection plan in place for California residents. California’s homestead exemption can be used by homeowners to protect a portion of their equity. However, this is frequently far less than the full value of their home and does not protect homeowners from exemption creditors. A qualified personal residence trust may also be used by California residents to protect their home. Like homestead exemptions, qualified personal residence trusts are subject to the claims of exemption creditors. The most bulletproof asset protection for California residents can be found in the use of equity stripping. Equity stripping is most effective when used in combination with an offshore LLC and offshore trust.