Wednesday, October 01, 2014

Asset Protection strategies

Here at Shenwick & Associates, many of our clients are understandably concerned about how to protect their assets from creditors––especially their home. While there are limits on how much asset protection we can provide clients when presented with an immediate crisis (i.e. a foreclosure sale), with advance planning, there are several strategies debtors can use to protect their most valuable asset. Let's look at a few of these asset protection techniques and devices:

1. The homestead exemption. Most, but not all states provide a homestead exemption (for example, New Jersey has no state law homestead exemption, forcing debtors to use federal bankruptcy exemptions, which are currently $22,975 per debtor, to retain any equity in their home). On the other end of the protections spectrum are states like Texas and Florida, which place no limit on home equity that can be protected from creditors. In New York State, the homestead exemption varies by region of the state, but for downstate counties, the homestead exemption is $150,000 per debtor. While that's a significant amount, given the value of real estate in the New York metropolitan area, many homeowners have much more equity in their homes than can be protected under the homestead exemption.

2. Ownership of your house as tenants by the entirety. There are several ways that two or more persons can own property–as joint tenants, as tenants in common or as tenants by the entirety. While any people can own any property in a tenancy in common or a joint tenancy, ownership as tenants by the entirety is limited to:

a. The state you live in must recognize this form of property ownership (New York and New Jersey do, but Connecticut does not).

b. You must be married to your co–tenant; this type of ownership is strictly limited to married couples.

c. The property must be must be your personal residence.

d. The tenants by the entirety must take title to the property at the same time and with the same deed.

In a tenancy by the entirety, neither spouse may voluntarily, or involuntarily, convey their interest in the home without the consent of the other. This rule places the home out of the reach of the creditors of one of the spouses. However, there are some circumstances in which the protections of tenancy by the entirety won't protect debtors:

a. Joint and several debts of the spouses;

b. Divorce; and

c. Death

3. Limited liability companies (LLCs) and family limited partnerships (FLPs). These two types of entities can be useful to hold real estate in. However, there are some potential drawbacks of owning a primary residence via a LLC or a FLP. For example, loss of tax benefits–when a property is owned by natural persons, mortgage interest is deductible, and when the home is sold, $250,000 of capital gains per person (or $500,000 for a couple) is exempt from capital gains taxes. Unless only one of the spouses owns all of the interests in a LLC or FLP, those tax benefits will be lost–and in a recent case, a court set aside the protections of a LLC even when only one spouse owned all of the membership interests in the LLC. Therefore, this may not be optimal for protecting a primary residence.

4. A qualified personal residence trust (QPRT). This is a special type of irrevocable trust that is designed to hold and own your primary or secondary residence. However, while having your residence owned by a QPRT has both asset protection and estate planning benefits, there are also some drawbacks. For example, you don't own your home anymore, and after the term of thrust ends, you will have to pay fair market rent to the beneficiaries of the QPRT.

5. More complex asset protection strategies. These may include getting a loan and/or a mortgage (or additional mortgages) to reduce the value of the equity in your home as much as possible (a so called "debt shield") and using a domestic asset protection trust or asset protected investments (such as annuities and whole or universal life insurance policies) to repay the lender.

As you see, asset protection strategies can get quite complex, and using entities such as LLCs, FLPs and trusts takes time to implement, which is why you should start planning right away to protect your assets, and not wait for a crisis like a judgment or foreclosure to strike. To protect your most precious assets for yourself and the ones you love, please contact Jim Shenwick.

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