Estate planning and asset protection go hand in hand. After all, planning for the distribution of wealth is useless if you have no wealth to distribute.
But, asset protection for real estate is particularly challenging, because it’s the only asset that can’t be moved. Many asset protection strategies involve relocating assets to domestic or foreign jurisdictions that offer greater creditor protection. But unlike other assets — such as cash, bank and brokerage accounts, stocks and bonds, cars, boats, jewelry, art and other collectibles — real estate can’t be removed from the jurisdiction in which it’s located. Let’s take a closer look at several strategies for protecting your real estate assets.
One of the most effective ways to protect real estate from creditors is to give it to your children or other family members, either outright or via a trust. Doing so places the real estate beyond the reach of your creditors and may also reduce your estate tax liability. The disadvantage of this strategy, however, is that you’ll lose all economic interest in and control over the real estate.
Further, although transferring assets may protect you from your creditors, the assets would now be subject to the claims against the person or entity to whom the assets were transferred. Keep in mind that gifting real estate — as well as the other asset protection strategies discussed later — won’t protect you from your existing creditors if a transfer constitutes a “fraudulent conveyance.” A fraudulent conveyance is a transfer of property made with the intent to hinder, delay or defraud creditors. The best way to avoid a fraudulent conveyance claim is to transfer property as early as possible, before any creditor claims arise.
Protecting your home
There are three strategies that can protect your home against creditors:
Tenancy by the entirety. About half the states allow married couples to hold title to their principal residence as tenants by the entirety. Similar to joint tenancy, tenancy by the entirety also protects the residence during the marriage against claims by a creditor of one of the spouses. It doesn’t protect the residence against a couple’s joint liabilities.
Homestead exemptions. A few states offer unlimited homestead exemptions, which protect a principal residence from creditors regardless of whether it’s owned by a couple or a single person.
Qualified personal residence trust (QPRT). A QPRT allows you to transfer a principal residence or vacation home to an irrevocable trust — thereby placing it beyond the reach of creditors. Unlike an outright gift or transfer to a regular trust, however, you retain the right to live in the home during the trust term. At the end of the term, the property is transferred to your children or other beneficiaries. QPRTs can also be used to reduce gift and estate taxes.
Protecting other real estate
For business and investment real estate, an effective asset protection strategy is to transfer title to a limited liability company (LLC) or limited partnership (LP). So long as the transfer isn’t a fraudulent conveyance and the LLC or LP is structured and operated properly, the entity shields the real estate from creditors’ claims.
A creditor with a judgment against an individual owner (a member or limited partner) can’t satisfy that judgment against the entity’s assets. Generally (but not in all cases), the creditor’s only remedy is to seek a “charging order,” which permits the creditor to intercept any distributions made by the LLC or LP to the debtor. So long as the entity doesn’t distribute the real estate or other assets to the debtor, the creditor’s efforts to collect are frustrated.
If you’re exposed to significant liability risks — either personally or professionally — it’s a good idea to have an asset protection plan. And the earlier you implement your plan, the more likely it is to succeed.