The key component of offshore asset protection is to remove property from the reach of U.S. courts’ jurisdiction. Naturally, in the case of U.S. real estate, this is especially problematic. Real estate always falls under the jurisdiction of the place it is in. While you may not be able to remove the actual property to an offshore jurisdiction, it may be possible to protect your equity in real estate through a process that is commonly known as equity stripping.
What is Equity Stripping
Equity Stripping means placing a loan on an asset in order to protect it from creditors. Your equity in a property is the difference between the property’s market value and any outstanding liens on it. If you purchase a new property and finance 80 percent of the purchase price with a mortgage from a bank, only 20 percent of the value is potentially available to your creditors because the bank already has priority over its secured loan amount.
Much like a traditional mortgage loan, equity stripping occurs when a bank issues a loan to you secured with the property you would like to protect. The bank then records the loan and obtains security interest priority over any later creditors. After the property owner closes a mortgage, the information becomes part of the public record. The public can access these documents from the county recorder’s office or using online public records for the duration of the loan.
That means an interested potential creditor will be able to learn if a property is burdened with a loan. By leaving little to no equity remaining in the property it means there is less value available to a potential creditor. Creditors are less likely to want to foreclose on a property if there will be little value remaining for them. All the while, you can still remain in control and enjoy your property even if your equity share is minimal.
The Equity Stripping Strategy
There are multiple different equity stripping strategies that can be used. One method involves receiving a loan from an international finance company with a U.S. subsidiary. The U.S. subsidiary advances the funds secured by the U.S. property and then the proceeds of the loan are invested offshore. The mortgage loan is properly documented, and the mortgage lien filed, and the principal and interest payments must be made on time and in accordance with the loan documents. This provides offshore asset protection for the funds without having to liquidate U.S. real estate properties.
Equity Stripping Pitfalls
While Equity stripping is a legitimate and safe method to protect your real estate, there are multiple potential pitfalls you want to avoid when implementing this strategy. Remember that it is always possible these loans will fall under the scrutiny of a U.S. court. For this reason, undocumented loans, loans between spouses, loans with your friends, family members, or business partners are generally not recommended. Even if asset protection is the main purpose of the loan, the loan must be for valid consideration, commercially reasonable, and meant to be repaid over time.
Can Equity Stripping Work for You?
Equity Stripping can be a powerful way to protect U.S. real estate. It can provide additional funds to invest while making your existing real estate less attractive to potential creditors. Equity Stripping is not for everyone, it requires increasing your level of debt and finding a legitimate lender that can provide you with a cost-effective loan solution. At Blake Harris Law we have access to offshore lenders that can provide custom loan facilities for your asset protection needs.
As with any other asset protection strategies, equity stripping works best when implemented well ahead of time as a part of a comprehensive asset protection plan which may include a Cook Islands Trust. If you have more questions about asset protection strategies for U.S. real estate or other assets, contact our experienced team at Blake Harris Law to create your asset protection plan. Call us today at 833-ASK-BLAKE, email us at Info@BlakeHarrisLaw.com, or fill out our contact us form.