As an asset protection attorney I get a lot of questions about how to protect home equity. For a lot of people that is one of their most valuable assets. And its no surprise that home owners are building more equity and are concerned about keeping it safe and sound. Reading some recent news headlines you’ll see home prices are rising faster in Washington than any other state and Seattle home prices continue to rocket up and break record prices.
So how do you protect your home equity if you are worried about lawsuits or just want to keep a firm grasp on your hard-earned assets?
The first question is to find out whether your home is already protected by what’s known as a “Homestead Exemption.” Homestead exemptions are federal and state laws that exempt certain amounts of equity in your personal home. These don’t apply to investment real estate or second homes. If you remember the Enron debacle, many of the people involved who expected to be sued or to declare bankruptcy, flocked to Texas and Florida. That is because (in addition to the Flora-Bama Interstate Mullet Toss) Florida and Texas have unlimited homestead exemptions. That means all of the equity in your personal residence is protected from lawsuits, creditors, and bankruptcy.
Most other states have a variable amount of equity that is protected under the exemption. For example in Washington state, there is a $125,000 homestead exemption. That means if the fair market value of your home, minus any mortgages, is less than $125,000 your home is safe from creditors. If you have more than $125,000 in equity, a creditor could force a sale of your house. The bank would get the balance of the mortgage, you’d get your $125k, and your creditor would get the remainder (whether that be $10 or $1,000,000).
What do you do if you have more home equity than is protected by your state’s laws?
First off you should not put your home in an LLC. It seems like an easy solution, but there are some major drawbacks to this: 1) you can blow your capital gains exemption when you sell the home, and; 2) a personal home is not a legitimate business so any attorney could easily pierce your LLC and get at the home.
The first line of defense should be insurance. If you don’t have one, look into an “umbrella” policy from your insurance agent. These policies are fairly affordable, but are usually only available once you’ve maxed out your auto and home insurance coverage.
Of course insurance companies aren’t in the business of giving away money, so you should be aware of the myriad ways in which your policy pay-out could be denied, such as home business activities, negligence, etc.
A second line of defense is a Domestic Asset Protection Trust. This type of trust provides some of the highest levels of asset protection and have been in common use for many years. One of the common drawbacks to this type of trust though is the expensive annual maintenance fees. Fortunately there are ways to avoid those high maintenance fees, but that will have to come in a later post. If you’d like to learn more, give us call.
Colin Ley is a Seattle asset protection attorney. He is also the co-founder of LayRoots along with his wife, Shreya.