With markets fluctuating and the future unknown, real estate asset protection has never been more relevant. Do you have a plan to protect your property in the event of a financial crisis?
Protect your property, business, personal assets, and future from creditors, judgments, lawsuits, and divorce with a detailed real estate asset protection plan.
The purpose of real estate asset protection
Whether you own a multi-figure commercial real estate rental business or have just purchased a single-family home, your real estate assets can be a core feature of your asset portfolio and play a substantial role in your legacy.
Lacking a plan, your real estate investments could be at risk from lawsuits, taxes, creditors, and more. A well-crafted asset protection strategy can safeguard you from this outcome by creating a legal wall between these threats and your personal or business properties.
Five strategies for protecting your real estate assets
An experienced Texas asset protection attorney can help you determine which asset protection strategies are the most relevant to your property and financial situation. Your plan may include some or all of the following strategies.
Forming an LLC
Business entities, such as Limited Liability Companies (LLCs), can hold a property and pay the mortgage and other expenses related to its maintenance. There are many types of LLCs and ways they can protect your assets.
Separating assets by creating multiple LLCs
If you own multiple rental or commercial properties (or many personal real estate assets), it may be wise to create multiple individual LLCs to hold them separately.
If a creditor makes a claim against one of your LLCs, that creditor can only access the assets held in that particular LLC. To claim multiple properties, they would be forced to track and file claims against all of your LLCs. Though not impossible, this process is expensive and time-consuming, which may act as a deterrent.
Create anonymity with LLCs
In addition to offering enhanced legal protection, managing real estate through an LLC makes it more challenging for creditors and other parties to determine exactly how much and which real estate you own. This prevents outside parties from finding (and pursuing) the full extent of your assets as part of a judgment, lawsuit, or claim.
A foreign entity is a company or LLC registered in a country other than where the investor lives or where their primary offices are situated. To obtain property held by an offshore entity, creditors and plaintiffs must navigate a foreign legal system, which can be prohibitively dense and expensive.
In some situations, creating an offshore entity can lead to more favorable tax rates, too.
Purchasing insurance is one of the most popular (and most straightforward) asset protection strategies you can implement.
A homeowner’s policy protects your real estate in the event of certain catastrophic events, as well as the potential financial burden of lawsuits.
A business policy protects you in the event that a customer sues your business for injuries or personal property damage sustained on commercial property. Business insurance policies may also shield your commercial real estate in the event that you’re sued for professional malpractice.
Landlord insurance may protect you from financial obligations when tenants are injured on your rental property. In addition to other costs, your policy may also cover medical fees, emotional distress, court fees, or funeral costs.
We often recommend that our clients consider an umbrella insurance policy to provide additional protection from legal and financial liabilities beyond what’s provided by the basic policies listed above.
Texas offers a significant amount of protection for certain exempt assets, including some personal property and real estate. For example, Texas state law can shield your primary residence from forced sale to cover debts and judgments in most circumstances.
In addition to real estate, certain personal property maintained on your homestead, like family heirlooms and ranching equipment, is also protected from creditors.
Of course, like any law, there are limitations. Your homestead may not be immune to claims from the IRS, property taxes, mortgage lenders, and some homeowners associations.
To most people, debt sounds like a bad thing—and it can be. However, debt can also be used as an effective asset protection strategy under certain circumstances. A process called “equity stripping” can reduce creditors’ and lawsuit plaintiffs’ incentive to pursue a claim against your real estate.
Here’s an example:
If you own a $150,000 property outright, it becomes a more desirable target. That $150,000 of equity represents a lot of money that an outside party could stand to gain by claiming your property.
However, if you strategically increase the amount of liens against your property, the amount of money someone might gain by obtaining and reselling it is limited. If the difference between the value of your property and the debt against it is significant enough, creditors and attorneys may ultimately decide that your property isn’t worth the effort to pursue.
Most self-titled trusts (trusts where you’re the beneficiary) don’t create effective asset protection against liabilities like creditors, lawsuits, or soon-to-be ex-spouses.
However, certain other types of trusts may be effective at protecting your real estate.
Domestic Asset Protection Trusts (DAPTs)
A Domestic Asset Protection Trust (DAPT) prevents certain assets, including real estate, from being included in your gross estate and, thus, being targeted by creditors.
Although Texas law doesn’t include a DAPT statute, it’s possible to set up a DAPT in another jurisdiction.
Offshore asset protection trusts
Offshore asset protection trusts hold assets outside of the United States, usually in a location that doesn’t enforce American legal judgments. Creditors or other entities who want access to offshore asset protection trust funds or assets are forced to navigate a foreign legal system, which can be prohibitively expensive.
Disclaimer: The law firm of Shann M. Chaudhry, Esq. doesn’t use this strategy in a way that violates IRS regulations or U.S. law. We only set up offshore asset protection trusts for legitimate purposes.
Work with an experienced Texas asset protection attorney
The right strategies can make all the difference when it comes to protecting your assets. And the sooner you start, the better.
At Shann M. Chaudhry Esq., Attorney at Law PLLC., we help individuals and families protect their real estate against the unpredictable with reliable legal asset protection strategies.
Whether your goal is to make sure your primary residence is well-protected or you’re hoping to expand your real estate portfolio from New York to Washington state, like Jeff Bezos, we’re here to help.
To learn more about protecting your assets, please contact us. With our client-centered, service-first approach, we’ll work closely with you to create a customized asset protection plan that is tailor-made to meet your needs.