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Protecting The Marital Home/Personal Residence

By Roccy M. DeFrancesco, JD, CWPP™, CAPP™ - Email Editor

Date : April 04, 2006

Unfortunately, there is no great answer on how to protect a client's personal residence. Because a client's personal residence, is for many years, their greatest asset, it is the most important asset to protect from creditors.

There are a handful of options at a client's disposal when discussing how to protect the home. However, there is only one foolproof way to do it, and few advisors and clients really understand it. Below I will briefly highlight the options, their flaws and the one option that does work. This will be a two-part article, where the second article will fully explain the proper way to asset protect your personal residence.

For those that would like a detailed summary of the issues discussed in this two-part article, please e-mail info@trustmakers.com to purchase a detailed summary.

Additionally, TrustMakers will be doing its first educational teleseminar where this issue will be discussed. To sign up for the teleseminar held on April the 18th, 2006 at 5:00 pm EST., please e-mail info@trustmakers.com . The cost of the teleseminar will be $25, which will include a PowerPoint presentation and a written summary.

Homestead Exemption

The first line of defense when “experts” talk about protecting the personal residence is the use of the homestead exemption. This topic is fully discussed in the detailed summary, but as a general statement, the homestead exemption is very limited in most states because it only protects $5,000-$10,000 of your home's value. In states like Texas and Florida, there is an unlimited homestead exemption that protects the entire value of the house however large it may be (with some new exceptions under the bankruptcy laws).

Since most of the country does not live in Florida or Texas, the homestead exemption is of little help to those who have more than $5,000-$10,000 of equity in their homes.

Tenants by the Entireties (TE )

Also as discussed in more detail in the detailed summary, states like Michigan allow married couples to own property titled as “tenants by the entireties” (TE). Owning property as TE means that each spouse has an undivided interest in the “whole” property. Even though each spouse owns 50 percent of the marital residence, they each have an undividable right to use the whole property.

A creditor cannot force the sale of either spouse's interest because to do so would affect the other spouse's enjoyment of the “whole” property. Therefore, if you live in a state where married couples can own property as TE, then by good fortune, you and your client's marital residences can be protected from many creditors.

The problem with TE is simple, which makes its use not recommended. TE does NOT protect the marital home from joint creditors (of which there are many). Therefore, we do not recommend that clients rely on TE to protect their personal residence.

Qualified Personal Residence Trust (QPRT)

The first tip-off that someone is not an Asset Protection Planner is their suggestion that the best way to asset protect a residence is through a QPRT.

A QPRT is an “Irrevocable Trust.” With a QPRT the client gifts their home to QPRT and then lives in it for a period of years rent free. After that period is up (usually the period is for a minimum amount of years), the client ends up paying non-deductible rent to the beneficiaries of the Trust and could actually be evicted from the home. A QPRT is an interesting but not too useful estate planning tool (the explanation of which is in the detailed summary) and it should not be used as an Asset Protection tool.

LLCs and FLPs

It is absolutely amazing how many advisors recommend that clients should transfer their personal residence to an LLC or FLP for Asset Protection purposes. Because many believe in the charging order protection afforded some LLCs/FLPs, it seems in vogue to make the recommendation.

It's a terrible idea for most clients.

Why?

1) The client could lose their capital gains tax exemption of $250,000 per spouse when selling the home.

2) The client is at risk of losing their ability to write off taxes and the mortgage payment.

3) In some states the property taxes nearly double if the home is not claimed as a homestead.

I will discuss this in great detail in the detailed summary and will on the teleseminar.

Debt Shields (Equity Stripping/Harvesting)

Debt shields have been around for some time, but few advisors know how to properly use them. A debt shield (also known as equity harvesting) is a fancy term for taking out a large loan on the home so no creditor will want it. Think about it, if your home has a huge debt on it, will a creditor want to seize that asset?

Most clients are adverse to debt and to mortgage payments. As I will discuss in some detail in the next newsletter, a debt shield can also be a terrific wealth building tool (especially when coupled with the 1 percent cash flow arm mortgage) if clients take the borrowed funds and invest them in something that will grow tax free and come out tax free in retirement.

Summary

Few advisors understand how difficult it is to protect the personal residence from creditors. For many clients, the personal residence is their largest asset and it would make sense for that asset to be protected from creditors. Stay away from relying on the homestead exemption or TE, and do not use a QPRT or an LLC/FLP to protect your home. If you are serious about protecting your home, you need to look into the concept of equity stripping, and you'll be pleasantly surprised how it can also create a nice retirement nest egg for you.

Again, for a detailed summary or to sign up for a one-hour teleseminar on this topic, please e-mail info@trustmakers.com

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