Anytime you own property or a business, there is a possibility that you could face a lawsuit. Someone could become injured on your property, a tree on your property could fall on a neighbor’s house, or creditors could sue you to collect a debt.
You can take steps to protect your property and assets from being taken away from you, but you must have this protection in place before a lawsuit occurs. In some cases, more than one type of asset protection may be needed, because no single type can protect you from all possible claims on your assets and property.
Homeowners InsuranceA homeowners insurance policy provides the basic coverage you need for liability protection. Your homeowners policy will cover liability claims for many common situations, up to the amount of coverage you have.
An Umbrella PolicyAn umbrella insurance policy covers liability costs that go beyond what your homeowners and auto insurance policies cover. It covers you against things that may not be found in a standard homeowners policy, such as slander and defamation of character, personal psychological harm, dog bites, and other situations. Having this coverage helps ensure that no one can take away your house.
A Domestic Asset Protection TrustMany people set up revocable living trusts to pass their assets down to their spouse, children, or other beneficiaries. However, placing your home in a revocable living trust will not necessarily shield you from creditors, because it can be changed or terminated at any time during your lifetime. As explained by estateplanning.com, the individual who creates a revocable trust maintains ownership of the home, and could be forced by a creditor to terminate the trust and surrender the assets.
Under the terms of a DAPT, beneficiaries must be discretionary, which means that they benefit only when the trustee permits it. In other words, the trustee does not have to make a distribution if it will be going to a creditor. And because a DAPT is irrevocable—it generally requires a court order or beneficiary approval to change it—creditors cannot force the trustee to terminate the trust and surrender the home.
Tenancy by the EntiretyBy titling your residence as a “tenancy by the entirety,” married couples can protect their property from lawsuits, says tax and legal expert Mark J. Kohler. Because each spouse owns 100 percent of the home, creditors cannot use the property as collateral to satisfy a debt or judgment that affects only one spouse. Since a lawsuit usually deals with one spouse or the other, the house cannot be taken away, since the other spouse had nothing to do with the issue. About 25 states currently allow this arrangement.
Put Your Home in the Low-Risk Spouse’s NameIf one spouse has a lower risk of facing a lawsuit, you can get similar protection by putting the house’s deed in that spouse’s name. The laws concerning this type of situation vary from one state to the next, so you would need to consult an attorney to learn how it works in your state. In the event of a divorce, however, this strategy could place your assets in harm’s way.
The Homestead ExemptionThe homestead exemption protects a homeowner or surviving spouse from being forced to sell a primary residence because of unsecured debt or bankruptcy. It protects some or all of the equity in the home from creditors, up to a certain dollar amount.
Homestead exemption amounts vary by state. Some states, such as Florida and Texas, have an unlimited exemption amount, making it very difficult for creditors to get a debtor’s home.
What Not to Do: A Limited Liability CompanyA Limited Liability Company (LLC) is an organizational structure designed to protect business owners from personal liability for the debts of the business. It limits liability to the business and its assets, so creditors can’t go after your personal assets. While some might advise including a home in an LLC, Mark Kohler advises against it for personal residences, since for protection to work in an LLC, your personal assets should be separate from your business assets.
For the best protection against lawsuits and creditors, you will need to consult a lawyer. You will also want to understand the limitations of each of the above tools to ensure that you have the best protection—not only for your home and assets—but also for your family and beneficiaries.