Financial Resource

Here’s a true but startling Real Estate Asset Protection fact: It’s estimated that every day, some 50-60,000 lawsuits are filed in the United States! That number is both staggering and sobering. What even more staggering that many of these lawsuits are frivolous and have no merit? It’s often been said that you don’t have to be right or wrong, just in the path of the attorneys with some “meat on the bone”.

Did you ever wonder why OJ Simpson left a critically acclaimed movie career in the Los Angeles area to live in Florida?
Yes, the civil judgments against him had a lot to do with it. Whereas homestead protection is very measly in California, it is almost absolute in Florida. A judgment lien recorded against a Florida homestead property cannot result in the foreclosure of the homestead.

Residential real estate can be best protected in states with generous homestead laws, such as Florida, Texas and Kansas. A secondary option for a residence is available for those who live in the states that provide for tenancy by the entireties for the ownership or real estate by a husband and wife. A third option would be the use of a qualified personal residence trust.

A strong form of protection is available with the use of a “Qualified Personal Residence Trust” (QPRT). This device is best suited to situations when there is a substantial estate tax problem and when the home (or a vacation home) has a substantial value. However, it seems to me it could also be used as a pure asset protection device for family real estate even when estate taxes are not a significant concern.

In a nutshell, the QPRT involves making a future gift of your residence (or a vacation home) to your children at the end of a term of years selected by you. The house is put into a grantor trust to hold the property until the term of the trust has expired. Until the end of the term of years, you continue to use the home. At the end of the term of years (selected by you), the home belongs to the beneficiaries of the trust – usually your children.

If you die before the end of the term of years for the QPRT, the home is included in your estate and you’ve gained nothing in terms of estate taxes. But – your home has been protected from creditors while the trust was in existence. Thus, a QPRT could be worthwhile purely as an asset protection device.

If you live beyond the term of years of the QPRT, the home is transferred to your children. Until recently, you could arrange to buy it back from them if you made the purchase before the end of the term of the trust. However, the IRS has recently ruled that type of repurchase arrangement will result in the loss of the estate tax benefits.

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