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Guarding Your Wealth for Senior Citizens
Protecting Your Equity from Lawsuits Requires
Understanding the Choices
Most secure method of protecting assets is an
irrevocable trust
By Jeffrey D. Voudrie, CFP
Sept. 11, 2007 - Many investors today are anxious
to protect their assets from litigation. As a result, there are many
professionals in the business of helping investors meet this need. But
consumers need to be very careful about the advice they receive and the
path they choose.
A recent reader’s question illustrates this point
perfectly. He and his siblings own a debt-free commercial property and
this is his story:
“My brother was told by someone he implicitly
trusts that mortgage-free properties are ‘sitting ducks’ for liens
resulting from lawsuits; that unless we ‘borrow’ [most of the equity] we
could very well lose the entire property to ‘thieves’ looking for
mortgage-free or low-mortgage properties.
“Our adult son is currently going through a
non-related legal battle that has cost him [tens of thousands of
dollars] so far. If his case goes to trial and should he LOSE this
trial, my siblings and I are being told we very well could LOSE our
co-owned property. Is that true?”
I can sure understand the reader’s concern. Either
the ‘implicitly trusted’ person didn’t understand the situation, or the
brother didn’t understand what that person said.
There are two issues that need to be addressed in
this situation. First, the risk to the siblings’ equity in this property
due to lawsuits, etc. Second, whether borrowing all the equity is the
proper way to mitigate that risk.
We live in a very litigious society and anyone can
sue someone else for just about any reason. That doesn’t mean they will
be successful. There has to be fault.
For instance, if one of the siblings above killed
someone in a car wreck then he/she will probably be sued. Any assets
he/she owned can be targeted. If the ownership in the above property is
tenancy in common then the portion owned by the other siblings is not at
risk. If, however, the property is owned via joint tenants, meaning that
they all own the property jointly, then the whole property would be at
risk.
But what about the legal troubles of our reader’s
adult son? Does that put this property at risk? No, it doesn’t. If the
son doesn’t have any ownership in the property then it is not an asset
that can be pursued by the other party. Even though the son may be the
beneficiary, he doesn’t own it until his father dies.
So it is true that assets like real estate equity,
as well as stocks, bonds, and mutual funds can be subject to loss in a
lawsuit, but only where an asset holder is at fault. To reduce that
risk, I’m not sure borrowing out the equity is the best solution.
Borrowing the equity is just going to transfer the
asset from one place to another. If one borrows against the building,
they have to put that money somewhere else. Usually, it will be exposed
in the new place as well.
The risk of loss can be reduced through insurance.
There is liability insurance that can be used, but the protection isn’t
complete.
The most secure method, in my mind, of protecting
someone’s assets is for them to be owned by an irrevocable trust. An
irrevocable trust protects the assets from the claims of creditors.
An irrevocable trust protects its contents from
outside threats, but not from inside threats. Think of it as a bubble.
The trust bubble protects what’s inside from being affected by a lawsuit
arising from something outside the bubble—like an automobile accident.
On the other hand, if a rental property is in the trust bubble, that
rental property is exposed to lawsuits dealing with that property. If
someone slips and fall on the property and sues, that property can be
lost.
That’s why it is recommended that there be separate
irrevocable trusts for each property. That way, each is isolated from
the risks associated with the others.
Of course, you can see that this can become very
involved. That’s why not too many people do it. Also, irrevocable trusts
can’t be changed so it’s very important that they be set up correctly.
The bottom line is that even though real estate
equity may be at risk to a lawsuit, borrowing the equity to invest in
something else doesn’t seem to me to be the best remedy.
If you have a specific question or would like more
information, give me a call toll-free at 1-877-827-1463 or you can also reach me by email at
jeff@guardingyourwealth.com.
I will answer your financial question FREE.
About Guarding Your Wealth:
“Guarding Your Wealth” is a
nationally syndicated weekly personal finance column written by Jeffrey
D. Voudrie, CFP. Mr. Voudrie is the President of Legacy Planning Group,
a private wealth management firm that employs sophisticated proprietary
strategies designed to protect and grow its clients' investments. Visit his website,
www.guardingyourwealth.com to read past articles under the Guarding
Your Wealth Article Archive that may not have appeared in
SeniorJournal.com.
Guarding Your Wealth for Seniors, on
SeniorJournal.com, is
a collection of columns by Voudrie that deal with issues of particular
interest to senior citizens.
Click here
for all columns.
In addition to being a nationally
syndicated columnist and Certified Financial Planning Practitioner, Mr.
Voudrie provides personal, private money management services to select
private clients
nationwide.
Looking for an energetic expert who
is passionate about financial and wealth management? Mr. Voudrie is an
excellent speaker who will excite and inspire your audience. Mr. Voudrie
is available for a limited number of speaking engagements, television
appearances and radio talk shows. For bookings, email
jeff@guardingyourwealth.com.
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