Asset Protection for Real Estate Investors – Part 2

Asset Protection for Real Estate Investors – Part 2

A high net worth and financial stability are the rewards of being a successful real estate investor. However, a real estate investor with free and clear real estate holdings is susceptible to significant loss in the event of a lawsuit and is a prime target for even a frivolous attack.

In recent years, the credit industry has reinstated home equity lines of credit, or HELOCs. For the free and clear homeowner or homeowner with high net worth, a HELOC loan can be an effective tool to discourage litigation. When a loan is made, a deed of trust is recorded for the maximum amount of the HELOC loan, even though the borrower has not removed any equity. For plaintiff’s counsel, looking at the investor’s financial situation and real estate equity, it appears that the investor is highly leveraged with little to zero capital to attack. This may discourage any further action against the Investor.

In addition to a HELOC, a limited liability company or holding company can be set up as a “safe haven for money.” This legal entity has only one function – to hold cash. It is not in the business of holding assets or running a going concern, it is simply holding cash. Once all HELOCs are in place, if a lawsuit is filed, the owner transfers all equity to Safe Haven LLC by writing checks for the maximum loan amounts and then sending the proceeds to Safe Haven LLC. As discussed in Asset Protection for Investors – Part 1, the use of limited liability companies is an effective anonymity tool for predators who would separate an investor from their wealth. An effective plan uses multiple levels of protection, including liability insurance, liability and legal structures.

While investment-grade real estate can be protected through LLCs and indebtedness, a personal residence presents a different set of challenges.

A homestead can be protected using a combination of land trusts, liens and homestead tax exemptions. The homestead exemption allows a minimum amount of equity to be protected regardless of the circumstances and is determined by each state as to the amount of the exemption. Private homes may have some form of indebtedness before they are placed in trust. The level of restrictions placed on trust beneficiaries will determine in part how successful an attack on the trust will be. As an example, an irrevocable trust is nearly impossible to attack, while a revocable trust may experience less protection for its assets.

The advice of an experienced asset protection attorney is advisable if you have significant real estate equity that is susceptible to attack. The article should not be used as legal, accounting or business advice and is not offered as such. Contact your advisor and get a full review before using any of the techniques found in this article.

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