By Garrett Sutton, Esq.
There is one asset most people forget to get complete asset protection for. It’s an asset that for the average population, is the biggest asset they will ever own. What is it? Their home.
It’s an asset worth anywhere from around $100k to a million dollars. Sometimes more! And most people never even think about all the ways they can protect it. Some you know, but I bet #3 & #4 may surprise you!
1. Homeowner’s Insurance
The most common way everyone knows about is through insurance. Everyone has homeowner’s insurance, right? But let’s consider this method. It is ironic that you can never ensure that insurance will insure you. There are loophole exceptions buried deep in the four-point, magnifying glass required type that let insurance companies off the hook.
So while insurance is the first line of defense for any real estate holding–be it your home or an investment property–because it is never bulletproof we need to develop other secondary lines of defense.
2. Homestead Exemptions
For your primary residence another line of defense is the homestead exemption. Texas, Kansas, Oklahoma and Florida offer unlimited homestead protection. Massachusetts offers $500,000 in home equity protection, whereas Kentucky only offers $5,000. Each state has different rules and dollar limits. A summary is found at https://www.corporatedirect.com/homestead-exemptions/.
The remaining two defense lines may surprise you. The first is debt.
Many people assume that debt does not provide asset protection because debt is money owed to someone else. This is true. But while you owe the money, remember that protected assets are in the eye of the attacker.
As an example, suppose you live in Nevada and own a $750,000 house with a $250,000 mortgage on it secured by a first deed of trust. You have $500,000 in equity and have just put a homestead on your house, which in Nevada offers $550,000 in homeowner protection.
How does an attacker see your situation? They don’t care that you owe the bank $250,000 on your mortgage. All they care is that the bank has a secure and superior claim to the first $250,000, which means they can’t get at it. Looking at the remaining $500,000 it is now protected by your Nevada homestead exemption. This means you as the homeowner have first dibs on that money. As such, with the first deed of trust and the homestead in place the attacker cannot get at any equity in the property. It is already spoken for to your benefit.
In this case, and in many like it, mortgage debt is to your advantage because it discourages and prevents an attacker from coming after you. What about the situation where your primary residence has a great deal of unprotected equity above the mortgage and the homestead exemption? Say your mortgage is $50,000, your homestead exemption is $10,000 and the remaining equity on the mansion is $1.2 million? How do you protect so much equity?
4. Limited Liability Companies (LLCs)
The last line of defense is the single-member limited liability company. As you may know, a limited liability company (or LLC) is an excellent way to hold real estate. You can elect favorable flow-through taxation and, especially with LLCs formed in Nevada and Wyoming, achieve outstanding asset protection.
For more information on how to make one or more of these strategies work best for you, please call our office today, and create an asset protection plan that is right for you.