Protecting Terra Firma, A Primer

Date: March 23, 2006

For many readers, your home is your biggest asset and the one you want to protect most. Many Asset Protection practitioners (some scumbags and some not so scumbag) hawking their wares, focus on this need for personal residence protection. As a result, there is a lot of misinformation out there.

In this newsletter, I will focus on some of the key traps and scams to avoid. First, start with the fact that your home is attached to the ground. It will always be in the judicial district of some local judge. You could pay me a million dollars to come up with the fanciest eight-inch thick multi-tiered plan to protect Terra and, if a judge doesn't buy it he can tear it apart with a single stroke of his judicial pen.

In short, most fancy asset protection technology designed to protect your home is hobbled by one simple fact: some judge (normally the same judge who presided over the case giving rise to the judgment you are fighting) also has and always will have jurisdiction over your house. The home cannot be removed from the judge's reach.

Because of this, I do not think homes are normally candidates for traditional Asset Protection involving Kinetic Asset Protection Trusts, Family Limited Partnerships, and the like. I normally advise my clients that their home is their least protectable asset. If you get too aggressive with your home you look like a pig and, if done at the wrong time, you will get eaten.

Yes, there are some important baby steps that can help protect your home legitimately. Most notably, a mortgage or equity line of credit (which need not be used when the financial seas are calm) from WAMU, Wells Fargo or some other third party lender combined with the safe but often small protection offered by each individual State's homestead laws. I will review this in detail in a forthcoming newsletter.

You could also hit the mother load by being a resident of one of the small number of states such as Florida or Texas that offer unlimited or nearly unlimited homestead exemptions to many residents. This will also be covered in a later newsletter.

Or you could live in one of the 13 States that offer Tenancy by the Entirety as a form of title holding. This is a centuries old form of ownership designed to protect the little woman from losing her home if her husband got in financial trouble (after all, she was presumed to be too stupid and powerless to do anything about it). The laws are different in each of these States and in many cases the protection is next to meaningless. Again, more on this in a later newsletter.

Well, that's about it for legitimate asset protection for homes. Not a good list at all.

KEY TRAPS AND SCAMS TO AVOID

Watch out for the peddlers of phony loans. These are usually people who will sell you some expensive pile of crap called a "Collateral Pledge Agreement" or the like and will record some loan from Aunt Tilda against your home, thus "sucking away" the equity. Sometimes, to make a little more money these scammers will offer to stand in for Aunt Tilda or even form a new entity to make the "loan." PROBLEM: There is never a real loan. Aunt Tilda just recorded a mortgage or deed of trust. The reality is that she is penniless, living off our so-called social security system. This always backfires and makes you look like a scumbag yourself as the judge removes the phony lien with the stroke of his judicial pen.

Watch out for people who urge you to put your home into a Family Limited Partnership or a Limited Liability Company. They tout the "charging order protection" you will have. They normally say that your creditors will not be able to pierce the veil of these entities and that your home will be safe. Well, I love these entities when used correctly, but they are not appropriate for personal residences in most cases.

WHY?

First, these entities normally only work well when they have a business purpose (which is great if you are leasing some home but not true if you are living there).

Second, you may lose your homestead protection in some States.

Third, you stand a risk of losing the federal income tax benefits associated with home ownership that are the deductibility of interest as well as the exclusion of gain and the ability to trade up and sometimes down to a new home.

Fourth, in some States the property taxing authorities will attempt to reassess your home if you transfer it to an FLP or LLC claiming that this transfer is a change of ownership.

Fifth, in some lunatic fringe cities like my favorite, New York, the authorities will attempt to charge you a city transfer tax and my favorite, a MANSION tax (in our inflated world this mansion tax will be due on a typical 600-square-foot studio condo in SOHO).

Sixth, the transfer to the FLP or LLC will almost always be a technical trigger to the due-on-sale clause in your home loan.

Remember, it is almost always best to extract equity (when the seas are calm) and protect it using traditional techniques that work.

Treasure your home, enjoy it, but don't for a moment think that it is safe from creditors. For those of us who don't live in a State with great homestead laws it is, in almost each and every case, our most vulnerable asset. Your next most vulnerable asset will normally be non-residential real estate. It also, like your home, is normally reachable by a creditor. I will be reviewing the protection of investment real estate in a forthcoming newsletter.

I hope you found this tidbit helpful.

Have a healthy and protected week

ABOUT THIS EDITOR:

Rob Lambert, Founder and former law professor is considered to be foremost expert on tax compliant asset protection structures. A contributing editor to Lexus Nexus debtor creditors series of law books Rob's passion is implement client wealth plans that stand the test of time and hold up under duress.

Full Bio - Email Rob