5 Ways to Protect Your Valuable Real Estate Assets
Your real estate assets are incredibly important and valuable–the last thing you would want is to have them used to pay for lawsuits. Here are 5 key ways to protect your real estate assets from creditors.
1. Homestead exemption
The homestead exemption allows homeowners in most states to protect a portion of their home value from creditors or bankruptcy. A homestead means the dwelling where the homeowner lives, essentially their house, condo, or sometimes even a manufactured home depending on the state. The amount which the exemption can protect you also varies state to state, along with the process in which you utilize it. But the idea is the same: creditors forcing you to sell your home in a bankruptcy suit will not have access to that portion of your equity outlined in your homestead exemption.
Homestead exemptions can be very complex, and it’s advised that you consult with a real estate attorney to ensure that you are utilizing them correctly and to their maximum potential.
2. Holding property in a trust
Placing property into a trust can help protect your assets from potential lawsuits. Since the “owner” of the property is the name of a trust instead of your name, it can be more difficult for creditors to actually find or attempt to seize your property (and gives you a bonus of added privacy). Typically, the longer you keep your assets in a trust the better protection you are afforded.
Domestic asset protection companies (or domestic asset protection trusts) are US-based trusts specifically designed to mitigate creditors or the effects of bankruptcy. They are becoming more popular, but are currently not available in WA state.
3. Using debt strategically
By using a strategic lien on your property with a mortgage, you can essentially “strip” your property’s equity and replace it with debt. This means that if creditors view the value of your property, the cash value (and attractiveness to pursue it) will appear much lower. This strategy is appropriately called “equity stripping.”
This can be effective in reducing the likelihood that creditors will actually pursue your home, but you have to be careful should you head to litigation. Simply mortgaging your home just to strip equity probably won’t pass muster in court. Working with a real estate attorney or financial advisor to establish a legitimate HELOC or mortgage plan will grant you the protection from creditors with confidence should you head to court in the future.
4. Risk Avoidance
Risk is an interesting subject when it comes to protecting your real estate assets. When it comes to physically protecting your property, implementing thorough tenant interviews or background checks may be appropriate if renting.
But avoiding risk can also be part of your property title strategy: for example, if one spouse has a lifestyle or business-related risk that may cause issues with creditors, you could consider removing their name from the title. Creditors would then be unable to access the “less risky” spouse’s valuable assets. This is a complicated strategy, however, because without a pre- or postnuptial agreement about property and debt, issues could arise with probate (or divorce). It’s always a good idea to consult with a real estate attorney to make sure your risk avoidance strategy is sound and applicable for your state.
5. Insurance
Utilizing proper insurance coverage can protect your property from a variety of potential situations that would create a claim. You could receive liability coverage for injuries, property damage coverage, or loss of rental income coverage (if it’s a rental and a tenant needed to relocate for repairs, for example).
You can also get an umbrella policy that covers these and more, offering even more protection from further potential lawsuits. It’s always a good idea to determine and utilize proper insurance coverage to protect your property.
These are 5 key ways to protect your real estate assets, but every property owner’s situation is different. As stated above, the rules and procedures for each of these strategies vary state to state. Funke Law Firm is authorized to consult in Washington State and Florida, so if you are looking to improve your real estate asset protection, contact us today!
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