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.
Here are several tools that may be available to protect your home in the event of a lawsuit.
A 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.
AllLaw says that most claims today settle for amounts equal to or less than the coverage limits. Most policies will also cover your legal defense costs.
An Umbrella Policy
An 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.
Umbrella policies do not cover personal injuries, injuries or damage that you cause intentionally, damage or injuries caused while conducting your business or professional duties. It is inexpensive, and WalletHub suggests that you buy it if the value of your property and assets is greater than your current insurance coverage.
These policies are relatively cheap: $1 million of coverage should cost $150 to $300 annually.
A Domestic Asset Protection Trust
Many 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.
Placing your home in a Domestic Asset Protection Trust (DAPT), on the other hand, can protect it from creditors. A DAPT is a trust vehicle that holds your assets and allows you to be the beneficiary, while an independent trustee administers the trust’s assets. Because you no longer control the assets (your home), you cannot be ordered to make a distribution for creditors.
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.
Over 15 states currently have laws that recognize DAPTs. Check to see if your state allows DAPTs. However, even if your state doesn’t recognize DAPTs, you may still be able to take advantage of their provisions.
Tenancy by the Entirety
By 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 Name
If 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 Exemption
The 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.
PocketSense says according to federal law, a homeowner must have owned the home for at least 40 months before a bankruptcy filing to claim the full value of the homestead exemption. Although the exemption is automatic in some states, you may need to apply for it in other states.
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.
The homestead exemption does not offer protection in the event of a foreclosure. If the mortgage payments have not been made regularly, a foreclosure will force the sale of the home.
What Not to Do: A Limited Liability Company
A 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.
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