How Do I Protect My Home From Creditors?

How Do I Protect My Home From Creditors?

“How do I protect my home from creditors?” This is a very common question that clients come in with. Whether it’s about estate planning, asset protection, business planning, or bankruptcy, there are a lot of different areas where this issue comes up. 

Common advice

People worry about their house. Maybe they have significant equity or it’s just a personal thing to them. They don’t want to have to move. So, what can they do to protect it? It’s pretty common advice out there to create an LLC, a limited liability company, and then take the real estate and put it into the LLC. 

Now, the LLC owns the real estate. The LLC is technically the owner on title of the real estate. If somebody slipped and fell at the house or there was some kind of obligation related to the house, then whoever’s going to get sued is going to be the LLC. And they can only go after the LLC’s assets, which is that house. 

When it doesn’t work

Now, this doesn’t necessarily work for someone’s primary residence. And there are a number of reasons why. People often say, “Hey I’m buying a rental property. Put it in an LLC.” Yep, that’s probably a good idea. “Hey, what about my house? I want to protect my house too. Shouldn’t I just put that in an LLC and that’s asset protection for my home?” 

 

Tax benefits

It doesn’t necessarily work that way because there are a number of problems when it comes to the primary residence, and most of them revolve around taxes. With your primary residence, you have a lot of things that help you from a tax perspective: capital gains, tax exclusions, deductibility of mortgage interest and taxes for real property. 

There are a number of reasons for tax purposes that you have a home, and it gives you some benefits. Most of those are lost as soon as you put it into an LLC because you no longer personally own the real property. And you personally were the one that got those tax benefits when it was your primary residence. Yet an LLC does not have a primary residence. So you lose most of your tax benefits when you put it into an LLC.

What about specialized trusts?

The same goes for an asset protection trust. In most cases, there are specialized trusts — and I’m not going to get into that right now — where you potentially can still keep your tax benefits, but you put it into an irrevocable trust for asset protection purposes. However, that’s very specialized and it doesn’t work all the time. So, I’m not really going to get into that too much right now. 

Generally, when it comes to your home, you also have a homestead exemption that you can apply, and it depends on your state how much it is. And that’s one of the ways that you can protect your home. 

If you put it in a family trust, a revocable trust, like a living trust, that’s fine. But if you put it into an LLC or an asset protection trust, i.e., an irrevocable trust, you lose your tax benefits, and that’s not a good idea.

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