Protecting Your Home

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.