It's often wise to title your home to a Single-Member Limited Liability
Company (LLC) because the home titled to the LLC avoids a judgment creditor's
attachment from clouding the home's title.
The limited liability company and family limited partnership can both protect
assets. But we wouldn't ordinarily title the home to a
family limited partnership or multi-member limited liability company (though some asset protection
planners do title the family residence to a limited partnership). The
downside is that you lose your home ownership tax benefits that you keep
if you title your home to a single-member limited liability company which
is a disregarded entity for tax purposes. The limited partnership is not.
A single individual has $250,000
capital gains tax exclusion on realized profits when they sell their home. If you title your home
to a family limited partnership or multi-member LLC for more than 3 out
of 5 years, you'll lose your homeowner tax benefits. You could transfer
your home to a family limited partnership for less than 3 years and then
retransfer your home back into your own name for at least 2 years, but
this can be impractical and expensive.
The better alternative: title your home to a single-member limited liability
company. If you're married, the less-liability prone spouse may be
that single-member. Since the IRS disregards single-member limited liability
companies for tax purposes, the home, for capital gains purposes, should
be treated as if owned directly by the individual member. You can't
use this tax-preservation strategy with a limited partnership, which requires
two or more partners and thus is not a disregarded entity. Review this
with your tax advisor.
Why do we like this strategy? Suppose a creditor wins a judgment, which,
if recorded, would cloud your home's title. If you previously titled
your home to the LLC, its title would be unaffected by the filed judgment.
The judgment would be against your name as the prior owner. This doesn't
necessarily extinguish the creditors' rights as the creditor might
try to reverse the conveyance as a fraudulent transfer.
Single-member LLCs are also sometimes liquidated by the courts when the
only member is the debtor, but including a second member would lose the
LLCs status as a tax-disregarded entity. Therefore, you need careful planning
to coordinate your tax and asset protection goals. But generally, if you
keep your home equity protected by homestead and mortgages, titling it
to a single-member LLC can then keep its title clear of personal judgments
filed against you. Remember that a transfer to an LLC may cause you to