How do people typically lawsuit-proof their home?
It's not that difficult to minimize the home equity that is exposed
to creditors. One can accomplish it in a number of ways. But combining
mortgages against the home with the protection of their state's homestead
laws are the two chief strategies. This dual strategy would leave little
or no equity exposed. However, one can take a number of other steps to
protect their home with exposed equity.
How vulnerable is the family home to lawsuits?
Most Americans consider their home to be their most valuable – and
vulnerable asset. Certainly, it's the one asset of greatest concern
when they are sued because they are most emotionally attached to their
home. The home is also vulnerable to lawsuits because it's usually
titled personally to their owners since personal ownership may be necessary
for conventional home financing and to claim the federal capital gains
tax benefits, homestead protection, and real estate tax abatements available
to seniors. Finally, the home is vulnerable because it can be readily
attached simply by filing a judgment with the county recorder. This effectively
transfers the home's equity to the creditor.
Is my home protected if I title it to my living trust?
Because a living trust is usually a revocable trust, it will not provide
protection. If you can revoke your trust, so can your creditors. Titling
the home to a living trust can nevertheless be advantageous because the
home will then avoid probate.
Could I gift my home and retain a life estate?
That strategy is similar to the qualified personal residence trust. You
could gift your home – usually to your children – and retain
a life estate. Though the life estate can be claimed by your creditors,
you can avoid its seizure by pledging your life estate interest as collateral
for a loan. Or you can lease-back the property for the term of your life
through a protective entity – such as an LLC. You achieve a similar
result by titling your home to an irrevocable trust and retaining a life
estate. Your home would transfer to the trust beneficiaries upon your
death. Still another variation on the theme is to sell your home to your
children in exchange for a self-liquidating loan which can be cancelled
during your lifetime or upon your death. Here, too, you would retain a
life estate to the home.