How to Protect Your Home from Lawsuits: 8 Smart Legal Strategies to Safeguard Equity

For most of us, our home is one of our most valuable assets. It truly is our "castle", but it can also be one of our most vulnerable assets. I will break down a few powerful strategies to help you protect your residence from a lawsuit.

Many of my older clients grew up being told to "always pay off your home first...before anything else". Now, we have Dave Ramsey teaching millions of Americans the evils of debt and to pay off your home as quickly as possible. That's all well in good. It feels safe to own your home free and clear...but is it?

The truth is, when you have hundreds of thousands of dollars in equity sitting in your personal residence we have two MAJOR problems:

1. Are you putting that equity to work and earning any sort of rate of return on all of that wealth (The answer is big fat No - but that's a topic for another day/article).

2. The equity in your home is the #1 target of an attorney in any sort of lawsuit.

So you think..."Well, I have auto insurance, home owners insurance, and that amazing umbrella insurance policy - surely no one could ever touch the equity in my home"... Wrong.

Examples of Lawsuits Where Insurance Won't Help You

Many times, the lawsuit and possible judgment threatening the equity in your home isn't even a liability created on or in the home. It's a liability that 'blind sides' us and we may completely unexpect it. Here are just a few examples of lawsuits that no type of insurance is going to rescue you from:

• Partnership dispute and accused of wrongdoing and breach of fiduciary duties
• Raising money for a project that goes bad and 'investors' blow the whistle with the SEC
• An employee makes a claim for sexual harassment and with the overtone of the 'Me Too Movement' a settlement is a must
• A rental property tenant gets significantly injured and your one-page LLC does exactly what it's going to do (nothing because you didn't set-up or maintain the LLC properly)
• Your teenage driver gets into a major accident and your insurance policy chooses to not cover the entire claim because there was alcohol and drugs involved
• Texting and driving is now criminal
• etc..etc...etc...

In all of these instances above, your home owners insurance has nothing to do with the claim and more than likely your Umbrella will do nothing to save you as well.

8 Ways to Protect Your Personal Residence

Before setting forth this list in a brief manner, please know that this topic deserves an entire chapter. Moreover, keep in mind that not only is every individual in a different situation with their assets, family, and types of risks they're facing, but EVERY STATE is just a little different in the way asset protection applies to a personal residence. Here are 8 possible strategies that could work for you in trying to protect the equity in your home.

1. Maintain Your Business Entities. Our first line of defense should be stopping the risk, not putting up the wall. If you're concerned about losing your home in a lawsuit because you are texting and driving, don't start by setting up an elaborate trust to own your home...simply stop texting and driving! This is the same thing when it comes to our businesses or rental properties. If you have worries that a customer, employee, or tenant may sue you, let's limit the risk FIRST before stressing about the structure to hold our home.

2. Umbrella Insurance. Next, I want to make sure I have all of the proper insurance policies in my life, including an Umbrella Policy. I'm still a huge fan of making sure you have proper insurance coverage. Any attorney that recommends you simply rely on legal structures and not buy insurance is taking a serious risk on your behalf. Umbrella insurance is cheap because it rarely pays out. The reason why it rarely pays out, is because it really is 'excess' insurance, not an 'umbrella' that covers a variety of situations.

3. Homestead Exemption. I like to start with this strategy because every state has this law on the books. Essentially, it's a pre-established statutory amount (set by each State's Legislature) to protect some amount of equity or value in a person's home from a creditor or bankruptcy. The amount varies from state to state as do the laws on how to avail oneself of this protection. In States like Florida and Texas, citizens enjoy an unlimited homestead exemption and it's very difficult for creditors to ever get a debtor's home.

4. Tenancy by the Entirety. If your State allows for this special type of law (on top of the Homestead Exemption), a married couple can really provide some significant protection for their home. When you record the title for your personal residence as "Tenants by the Entirety", the equity is protected for an innocent spouse when the other spouse gets into a lawsuit or has a judgement against them. There are approximately 15-20 States that have this law on the books.

5. Equity Stripping. This involves placing a lien on the equity in your personal residence and is commonly referred to as Equity Stripping. By doing so, if a creditor comes after your home, they have to satisfy any liens before they can get at the equity. A simple HELOC (Home Equity Line of Credit) will protect a good portion of the equity and free up cash for you to invest or access in an emergency.

6. Qualified Personal Residence Trust (QPRT). A QPRT is an irrevocable trust specifically designed to hold a personal residence. The homeowner transfers the home into the trust, retaining the right to live in it for a specified number of years. After that term, the home passes to the designated beneficiaries (typically children). This removes the home from the homeowner's estate for estate tax purposes and can offer some asset protection benefits.

7. LLC Ownership. In some states, it may be possible to transfer your personal residence to an LLC. While this is not allowed or practical in every state, where it is available, it can provide a layer of protection by separating the asset from your personal name. However, this strategy requires careful consideration of tax implications, including loss of the capital gains tax exclusion on the sale of a primary residence.

8. Irrevocable Trust. For more comprehensive asset protection, an irrevocable trust can be used to hold your personal residence. Once the home is transferred to the trust, it is generally beyond the reach of your creditors. However, this is a significant step that involves giving up control of the asset, and should only be undertaken with the guidance of a qualified attorney.

Please be open to protecting your equity in creative ways. I'm not saying it's bad to pay off your mortgage and own it free and clear, however, it is just plain naive to pay off your home and not realize you are seriously exposing yourself to a loss.

Certified as a Tax Advisor By: Mark Kohler

Mark J. Kohler, senior partner at KKOS Lawyers and co-founder of Directed IRA, has over 25 years of experience helping entrepreneurs achieve financial freedom. Through YouTube, books, and live trainings, he breaks down complex strategies into simple, actionable steps. His Main Street Certified Tax Advisor Program now equips CPAs and agents to share these insights with clients.

Disclaimer:

The content provided on this blog is for educational and informational purposes only. It is not intended as legal, tax, or financial advice, and should not be relied upon as such. Laws and regulations vary by jurisdiction and may change over time. Readers are strongly encouraged to consult with a qualified professional—such as a licensed attorney, accountant, or tax advisor—for advice tailored to their specific situation.