- Hi, Clint Coons here with Anderson Business Advisors.
And in this video, we're gonna discuss
how to protect your personal residence.
All right, let's get started.
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Okay, so here's the deal.
I get this question all the time.
"Clint, how do I protect my personal residence
from creditors if I get sued?"
Well, you have to be strategic about it.
It's not like how we structure
general real estate investments, okay,
when we get complicated with corporations, LLCs,
holding LLCs and moving things around
and partnerships involved.
That doesn't work for your personal residence.
Because with a personal residence,
we have to be sensitive to certain things.
Number one, homestead exemption.
Now what is a homestead exemption?
Well, every state provides some level of equity
that a creditor couldn't take from you.
If you lived in Florida and you had
a personal residence in Florida,
here's my property and I had $800,000 in equity
and someone came after me and they get a judgment against me
for a million bucks, they can't touch that property.
And that's why O.J. still lives in Florida
because they can't take his house from him.
Now if he sells his house and he converts the equity
in his property to cash, well, that's a different story.
Now some states don't give you
this unlimited homestead exemption.
They may say, "Well, you could hae $800,000 equity,
but you only get 10K."
That is, if a creditor goes after this asset
and they sell it at auction,
you get 10K, creditors get $790,000.
And you just look at that and you're going,
"Well, that's not fair.
They can take my house from me.
I want some protection."
I get it.
So what do we do?
Well, one way to protect your personal residence,
I tell people, is to understand where that lawsuit's
typically gonna arise from.
A residence is gonna be put at risk
because of something that we do personally.
So you're out there and you're involved
let's say in a car accident.
You own this house.
So somebody is going to sue you.
They're not suing your house.
They're going after your house 'cause they get a judgment
against you for $1 million and they wanna collect on this,
so then they're gonna go after an asset
that appears in your name.
And so when a creditor's now looking to collect,
they're trying to figure out,
what real estate is your name attached to?
And sometimes they don't even try
to take the house from you.
All they do is record the judgment in the county
where your property's located,
and the judgment now attaches to your personal residence.
So if you try to refi or sell,
they know they're gonna get paid.
Worst yet, many of those judgment will grow
at 10% statutory rates of interest.
I mean, that's a great investment for somebody.
Just keep that judgment on an individual,
and as they're paying their mortgage down,
you're building more equity for your creditors.
So that's an issue,
and how do we go about protect that then?
Well, the first thing is, we wanna get the property
out of your name.
So what I like to do
is create a land trust here, land trust,
and use a nominee trustee.
Remember, in some of my other videos,
I talk about using a Wyoming LLC as a trustee over here?
Why am I gonna do this?
Because when I take my property and I deed it out
of my name into this type of structure,
let's say the name of this LLC
is D-10 LLC.
So and the name of this trust is Green Thumb Trust.
So title now would read as follows,
D-10 LLC Trustee
of Green Thumb Trust.
Right, I just truncated that down there.
So that's how title's gonna read.
It used to be in my name, Clint,
but now it's no longer in my name.
Now it's in the name of a trustee in the name of this trust.
So if I was sued personally
and a creditor obtains a judgment against me
and they take that judgment and they record it
in the county where they think I reside,
what's gonna happen is,
that judgment will attach to any real estate
my name appears on.
You see what I just did, though?
I took the property out of my name,
put it into this trust,
so that property no longer appears in my name.
So that judgment doesn't stick to it.
So what does that do for Clint?
Well, it gives me the ability, then,
to sell that property and not have a portion
of those proceeds taken out of escrow
and paid to my creditor.
All the proceeds would come to the trust,
so I would have free access to 'em.
If I can find a lender who's willing
to refinance the property in the name of the trust,
I can refinance that property
without having to pay that creditor off.
So the land trust gets the property out of your name,
puts it in a vehicle that you're no longer associated with,
so judgments don't attach.
So that's the first step in protecting
your personal residence, move it out of your name.
If you live in an unlimited homestead exemption state,
I wouldn't, I would still use this strategy.
Why?
Because when you sell that property,
if you wanna move to another one,
you live in say Florida, the problem is,
once that becomes cash, if they find out about it,
they can go and garnish your account and get that cash
'cause it's in your personal name.
So we wanna always keep it out of our personal name.
So the second step in this overall structure
is you could take your beneficial interest
in the land trust if you so desire
and create a second LLC down here.
This is gonna be a disregarded LLC.
What do I mean by that?
A disregarded LLC does not file a tax return.
I'll typically set this up in Wyoming.
So now I'll take my land trust
and have my land trust held by the Wyoming LLC,
just like that.
So I've got a different LLC as a trustee,
the beneficial interest is this other LLC over here.
Now does anybody know about this?
No one knows about it because it's all private.
None of, all the transfers with the trust itself,
this does not hit a public record
because it's not recorded anywhere.
The only two entities that are recorded are these two.
The only one that the public's gonna see is this one
because it's tied to the property as a trustee.
They don't know about this one down here.
Why would you do that?
Well, you're gonna be the member
of that limited liability company.
And in a lawsuit, if somebody gets a judgment against you,
one of the things they may do is bring you
into a debtor's exam, supplemental proceedings,
and they're gonna ask you,
"What do you own?
Do you own a personal residence?"
Well, in this example here, how would I answer that?
How would you answer that?
Do you own a personal residence?
If you're saying yes, look at the diagram here.
The personal residence, the house, is owned by what?
The trust.
It's not owned by you.
So if they ask me, "Do you own a residence?"
my answer is, "No, I do not own a personal residence."
"Where do you live?"
"I live in a property located here."
"Do you own that?"
"No."
"Do you have any ownership interest indirectly in it?"
Well, the answer to that is no.
Well, you have to probably say yes.
"Well, how is it held?"
"Well, it's held through a limited liability company."
Oh, so now they start unraveling.
They find out that you have an LLC.
So now what they need to do is this.
They need to figure out a way to break the LLC
in order to get to your property.
Now is this scenario here bulletproof?
Not quite, because the argument they could use
to break the LLC is that your LLC is a business entity.
It holds an asset that you're living in,
you're not paying rent, so you're not treating it
as a business activity.
Therefore, it lacks substance.
And that's a legitimate argument.
But how many creditors are willing to spend the time
and the money to go through that process?
How 'bout if you could offer 'em this?
"Listen, you can try to fight this
and I'm gonna fight you the entire way going against it,
or we could settle.
Take my policy limits, maybe I'll agree to give you
a little bit more and we go our separate ways."
So what this is doing is putting some
of the bargaining power back into your hands.
That prior to that, when you have all the assets
in your own name, it didn't exist.
Now if you wanna take it one step further
or not use this and use one other technique,
then you could always utilize what's called
a friendly lien.
Okay, or you get an equity line of credit
against your house.
You go to the bank and have 'em file
and equity line of credit, get a HELOC.
There's two ways to do this,
get a HELOC on your property or friendly lien.
And all that's doing is taking the equity
out of the property.
So if somebody does look at the property,
they see that you've got this house
and the fair market value of the house is $900,000,
but you have debt on it of 900K.
So there's no equity.
So even if you wanted to go after my house,
you would never get paid.
So it's not even worth your time.
Again, take my policy limits and go away.
So it gives you bargaining position.
If you're not familiar with the friendly lien strategy,
check out my zero-loss real estate strategy
on my channel where I talk
about how you can take real estate
and make it seem extremely unattractive to a creditor,
and that's why I call it my zero-loss strategy
where I discuss it in-depth.
But this is how I typically strategize
for protecting personal residences.
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