Whether you own rental property or want additional protection for your personal residence, there are several solutions available to protect real estate, including irrevocable trusts, offshore trusts, limited liability companies, and equity stripping. Your business and personal liability could cost you more than just money and other assets if you receive a judgment in a business or civil lawsuit.
Your real estate assets are valuable; they earn money from rental property, allowing you to borrow against your home’s collateral and leave an inheritance for your family members after you pass away. Protect your assets against lawsuits and business creditors.
Can You Protect Real Estate from Lawsuits?
Our society is extremely litigious, leaving high net-worth individuals at risk of losing homes, real estate investments, and other real property as part of a lawsuit. When you own real property, the courts may seize it to pay for a judgment against you in court.
People at higher risk for litigation include doctors, engineers, architects, real estate investors, celebrities, and high net-worth individuals. Car accidents, medical malpractice, class action lawsuits, and defamation cases can lead to losses of real estate assets.
You can protect your real property from seizure by the courts using a combination of asset protection strategies for your real estate assets. Trusts, LLCs, equity stripping, and homestead exemptions can all offer varying degrees of asset protection for your real estate.
How to Protect Real Estate from Lawsuits
If you need to protect your assets from potential lawsuits or creditor claims, you should consult an experienced asset protection attorney. The right legal professional can help you assess your vulnerabilities and needs and make personalized recommendations about which asset protection options would best suit your real estate assets and risk factors.
Create a Domestic Asset Protection Trust
Domestic asset protection trusts (DAPTs) are a type of irrevocable trust that allows you to transfer real estate assets into a trust based in another state. Assets held in a DAPT are subject to that state’s laws, taxes, and other regulations, but the trust technically owns the real estate assets held within the trust. Additionally, the grantor who creates the trust can also name themselves as the beneficiary.
Your DAPT can protect your real estate assets and other assets, such as LLCs, corporations, and other business assets. If you create an LLC for each piece of property you own, then place each LLC into a DAPT, your properties will have that additional layer of protection beyond using only an LLC or DAPT for lawsuit protection of your real estate assets.
While most states protect real estate assets in a DAPT from seizure by another state, court order protection is stronger in some states than others. The five best states to open a domestic asset protection trust are Alaska, Delaware, Nevada, South Dakota, and Wyoming. However, all DAPTs are subject to U.S. court orders and can therefore be compromised by a U.S. court.
Create an Offshore Trust for Asset Protection
Offshore asset protection trusts allow you to transfer control of your assets to an offshore trustee for protection. Some countries don’t recognize judgments made in the U.S. court system and will not allow the courts to seize assets from an offshore asset protection trust.
Offshore asset protection trusts are also usually irrevocable trusts and offer stronger protection than DAPTs. You can also store several assets in an offshore trust, including moving cash into your offshore account.
Hold Property Owned in Limited Liability Companies
Creating a separate LLC for each property you own can prevent plaintiffs or creditors from targeting all your real estate assets in a single lawsuit. You can create a limited liability company for each property and use an anonymous land trust to prevent your name from entering the public record.
By storing assets in a limited liability company, they become business rather than personal assets. If you face a personal lawsuit for malpractice, an auto accident, or other civil matter, your assets in the LLC belong to the business rather than being personal assets.
Use an Equity Stripping Strategy
Whether it’s your primary residence or rental property, one common strategy to protect your assets includes devaluing the equity in the asset to make it worthless for creditors or courts to pursue for settlement.
Many real estate investors take out a loan against their property’s equity and put the money into an annuity or other financial plan protected by state law. Protecting your assets with equity stripping reduces the value of your property, so it isn’t worth a plaintiff’s or creditor’s time and effort to pursue in court.
You should strive to reduce the value of your equity to 25% or less of its original value. For example, if a rental property has $160,000 in equity, you will want to borrow at least $120,000 to leave a maximum of $40,000 in equity on your real estate. Taking out a loan against the property places a lien on it as collateral against the loan, making it less attractive to creditors and courts.
Get an Insurance Policy
An umbrella policy on your home and auto insurance policies will offer additional coverage beyond your current limits to cover personal injury or other liability lawsuits. Additional liability coverage can protect your assets from seizure in a lawsuit if the settlement amount exceeds your current insurance policy limits.
An umbrella policy is additional liability coverage, meaning it covers you for injuries or property damage you cause in an accident or on your property. If your home, vehicle, or rental properties suffer damage, your liability policy will not cover those damages.
A homestead exemption will protect equity in a home from creditors. Some states offer unlimited protection on homestead property, while others limit the amount of protection offered. New Jersey and Pennsylvania do not currently offer a homestead exemption.
Homestead exemptions only protect your primary residence. If you own real estate assets, such as a second home, investment property, or undeveloped land, these properties do not have protection from creditors and lawsuits.
Because the exemption varies from state to state, you need to consider how to protect your home from seizure based on your state laws. A homestead exemption can give you a false sense of security about the safety of your home under certain circumstances. You should consider combining your exemption with some of the above strategies to secure your home against lawsuits and creditors.
Choosing Asset Protection Depending on Your Risk Variables
Why do you need asset protection? Are you in a high-risk career such as healthcare, engineering, or real estate development? Are you a real estate investor who owns multiple properties and has several assets and liabilities? Are you still making mortgage payments on any of your properties?
These are all questions you need to consider when speaking with your asset protection attorney. Whether you choose an offshore trust, an LLC, equity stripping or some combination of these, your asset protection planning attorney can help you determine the best solution or combination of solutions to fit your situation.
Can You Transfer Your Real Estate Assets When There Is a Lawsuit Against You?
Most real estate asset transfers must occur prior to someone filing a claim against you in court. If you transfer your property to a DAPT or an offshore trust too soon before a claim, the court may interpret it as a fraudulent transfer in anticipation of the upcoming lawsuit.
One of the benefits of transferring property into an offshore trust is that many of these countries are not bound by a ruling from a U.S. court to seize assets held in a trust in their country.
What is a fraudulent transfer, and how do you avoid fraud in real estate asset protection? Generally, if you transfer property out of your possession into a DAPT or offshore trust without receiving fair market value in return for the property, you’re at risk of a fraudulent transfer of property if the court suspects you were aware of an upcoming claim.
Contact Blake Harris Law for Real Estate Asset Protection Planning
When you need to protect real estate from lawsuits, turn to our experienced asset protection team at Blake Harris Law. We focus on asset protection for people in litigious careers, high net worth individuals, real estate investors, and people with high-value real property assets. We can help you compare your options between DAPTs, offshore trusts, LLCs, and our proprietary Titanium Trust℠ for real estate lawsuit protection. We proudly serve clients around the globe.
Contact us online to schedule a consultation with a real estate asset protection attorney.