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Financial Crunch: Now Is the Time to Protect the Equity In Your HomeIf you wait to take action or precaution about your financial security, it could be too late. Here is one plan to protect your home.
Kelly Lacy
Don't wait until it's too late to protect your home.
“ ...Homeowners who will not be able to remain in their homes will be staggering as a result of the devastation of Covid-19.”
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When the stock market is crumbling, people get scared. They are reminded of the terrible economic times of the 2008 Great Recession. There are fears that the one headed our way could be even worse. With that in mind, we must examine what we learned from that Great Recession in 2008 and ask if we should put those lessons to use right now, keeping in mind that the well-being of our family depends often on the house we own and live in.
One of the more crucial lessons couples learned is how to take advantage of protecting their home. Immediately, couples should take steps to place a barrier between some future plaintiff and the valuable equity in their residence.
The 2008 teachable lesson revolved around the need for a homeowner to safeguard his/her/their home.
Sadly, there will be many people who will likely be faced with foreclosure because of the inability to pay the mortgage. The incalculable number of homeowners who will not be able remain in their homes will be staggering as a result of the devastation of Covid-19. While we are some time away from losing our homes (and/or equity in them—it might be months thanks to new government mandates and mortgage lenders cutting homeowners a break), but we must plan now—couples/homeowners should not wait another day!
Here is what you should know: Every state has a homestead exemption. That is an amount a judgment creditor cannot take from you. In some states, e.g., Kentucky, Tennessee and Virginia, that amount is quite small: $5,000. That means if someone has a judgment against you, and your home has $100,000 of equity, the judge will let the creditor sell your home, write you a check for $5,000, and pocket the other $95,000. In other jurisdictions, e.g., Arkansas, D.C., Florida, Iowa, Kansas, Oklahoma, South Dakota and Texas; the amount is unlimited. Most other jurisdictions are somewhere in between: $100,000 in California (if you are under 65) and Idaho; $125,000 in Washington, Vermont and Delaware; $150,000 in Arizona; $250,000 in Montana; $500,000 in Massachusetts and Rhoda Island; and $550,000 in Nevada.
Creditor protection planning for your residence will not make the equity in your home "bullet proof" though. Why not? Because your home is where you live. So even if you transfer title to a trust in the Cook Islands, a judge in your state could just ignore that trust and order the county recorder to change title to your creditor’s name.
Creditor protection for your home is, instead, trying to put a hurdle between that valuable equity (the amount above your homestead exemption) and some future creditor, trying to make the equity look less attractive; hopefully giving you the ability to negotiate a settlement for pennies on the dollar.
Here is an idea you may not have thought of, but implementing it is a prudent strategy for keeping your home’s equity and it is not hard to do—in fact, it’s comparatively simple: Sell your home to an irrevocable trust for your children’s benefit. The following is where to start:
* Get an appraisal of the current fair market value. Put enough cash in the children’s trust so it can pay you a 10% down payment. If you structure the children’s trust properly you will not recognize gain on the sale.
* Get an appraisal of the fair market rent. If things work out well, the amount you must pay the children’s trust for rent will be enough to cover what the children’s trust owes you on the note and what it must pay for property taxes, homeowner’s insurance and other expenses a landlord must pay, plus a profit.
* Do this carefully: a residential lease is not good for more than 18 months, so people who start down this path with the best of intentions seldom follow up to keep it in good order.
Additionally, there are at least eight other ways to put a stop-gap between your valuable equity and some future plaintiff. The single most important element is time: Here is what you need to know:
* Set up the structure several years in advance of having a problem. Each state has a statute of limitations on how long the creditor can argue what you did is a fraudulent transfer.
* If the creditor convinces the judge (or jury) that is what you did, your planning fails.
* For instance, in California that statute is seven years. If you want the plan to work in 2028, you better set it up this year.
* In other states, the statute is as little as two or four years.
All this takes careful planning and quick action. In sum, those who fail to plan, plan to fail.
Advice expressed here is that solely of the author. It is recommended you seek personal counsel before taking any action.
Bruce Givner is tax attorney and of counsel at KFB Law Group in West Los Angeles. He received a B.A in History (graduating cum laude) from UCLA in 1973, a J.D. in 1976 from Columbia University Law School, and an LL.M. in Taxation from New York University’s Graduate Law School in 1977. Givner is also featured in Wikipedia with regard to his role in the Watergate event. He also is the author of "My Watergate Scandal Tell-All: How I Unwittingly Caused this Historic Event." Givner has been favorably cited by both the U.S. Tax Court and the California Court of Appeals. He has served as an adjunct professor at Golden Gate University and the University of San Diego tax law programs. Givner has had more than 100 articles published in professional journals. Givner has earned the highest rating possible since 1987—5.0—an AV coveted distinction in the Martindale-Hubbell Registry. He has been deemed a "Super Lawyer" by his peers since 2011. Givner represents celebrities and high-net worth real estate families.
One of the more crucial lessons couples learned is how to take advantage of protecting their home. Immediately, couples should take steps to place a barrier between some future plaintiff and the valuable equity in their residence.
The 2008 teachable lesson revolved around the need for a homeowner to safeguard his/her/their home.
Sadly, there will be many people who will likely be faced with foreclosure because of the inability to pay the mortgage. The incalculable number of homeowners who will not be able remain in their homes will be staggering as a result of the devastation of Covid-19. While we are some time away from losing our homes (and/or equity in them—it might be months thanks to new government mandates and mortgage lenders cutting homeowners a break), but we must plan now—couples/homeowners should not wait another day!
Here is what you should know: Every state has a homestead exemption. That is an amount a judgment creditor cannot take from you. In some states, e.g., Kentucky, Tennessee and Virginia, that amount is quite small: $5,000. That means if someone has a judgment against you, and your home has $100,000 of equity, the judge will let the creditor sell your home, write you a check for $5,000, and pocket the other $95,000. In other jurisdictions, e.g., Arkansas, D.C., Florida, Iowa, Kansas, Oklahoma, South Dakota and Texas; the amount is unlimited. Most other jurisdictions are somewhere in between: $100,000 in California (if you are under 65) and Idaho; $125,000 in Washington, Vermont and Delaware; $150,000 in Arizona; $250,000 in Montana; $500,000 in Massachusetts and Rhoda Island; and $550,000 in Nevada.
Creditor protection planning for your residence will not make the equity in your home "bullet proof" though. Why not? Because your home is where you live. So even if you transfer title to a trust in the Cook Islands, a judge in your state could just ignore that trust and order the county recorder to change title to your creditor’s name.
Creditor protection for your home is, instead, trying to put a hurdle between that valuable equity (the amount above your homestead exemption) and some future creditor, trying to make the equity look less attractive; hopefully giving you the ability to negotiate a settlement for pennies on the dollar.
“Every state has a homestead exemption. That is an amount a judgment creditor cannot take from you.”
Here is an idea you may not have thought of, but implementing it is a prudent strategy for keeping your home’s equity and it is not hard to do—in fact, it’s comparatively simple: Sell your home to an irrevocable trust for your children’s benefit. The following is where to start:
* Get an appraisal of the current fair market value. Put enough cash in the children’s trust so it can pay you a 10% down payment. If you structure the children’s trust properly you will not recognize gain on the sale.
* Get an appraisal of the fair market rent. If things work out well, the amount you must pay the children’s trust for rent will be enough to cover what the children’s trust owes you on the note and what it must pay for property taxes, homeowner’s insurance and other expenses a landlord must pay, plus a profit.
* Do this carefully: a residential lease is not good for more than 18 months, so people who start down this path with the best of intentions seldom follow up to keep it in good order.
Additionally, there are at least eight other ways to put a stop-gap between your valuable equity and some future plaintiff. The single most important element is time: Here is what you need to know:
* Set up the structure several years in advance of having a problem. Each state has a statute of limitations on how long the creditor can argue what you did is a fraudulent transfer.
* If the creditor convinces the judge (or jury) that is what you did, your planning fails.
* For instance, in California that statute is seven years. If you want the plan to work in 2028, you better set it up this year.
* In other states, the statute is as little as two or four years.
All this takes careful planning and quick action. In sum, those who fail to plan, plan to fail.
Advice expressed here is that solely of the author. It is recommended you seek personal counsel before taking any action.
Bruce Givner is tax attorney and of counsel at KFB Law Group in West Los Angeles. He received a B.A in History (graduating cum laude) from UCLA in 1973, a J.D. in 1976 from Columbia University Law School, and an LL.M. in Taxation from New York University’s Graduate Law School in 1977. Givner is also featured in Wikipedia with regard to his role in the Watergate event. He also is the author of "My Watergate Scandal Tell-All: How I Unwittingly Caused this Historic Event." Givner has been favorably cited by both the U.S. Tax Court and the California Court of Appeals. He has served as an adjunct professor at Golden Gate University and the University of San Diego tax law programs. Givner has had more than 100 articles published in professional journals. Givner has earned the highest rating possible since 1987—5.0—an AV coveted distinction in the Martindale-Hubbell Registry. He has been deemed a "Super Lawyer" by his peers since 2011. Givner represents celebrities and high-net worth real estate families.
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