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.
Giving gifts
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.
Plan early
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.
Source: http://www.jdsupra.com/legalnews/protecting-your-real-estate-assets-03666