Entrepreneurs can provide essential groundbreaking advancements for industry and society. Unfortunately, while being an entrepreneur can offer lucrative financial rewards and great satisfaction, it has its share of risks, as well. Not all of those who follow this path are happy with some of the side effects that go along with being a successful businessperson. They can put the entrepreneur at risk for lawsuits, both legitimate and frivolous.
Tech industry innovator Steve is just such an entrepreneur. Successful in his pursuits, Steve now has a large estate he wants to protect for his children. He is especially interested in safeguarding his $10 million-plus Silicon Valley home for his family.
The Right Irrevocable Dynasty Trust Brings Peace of Mind
Concerned about the potential for lawsuits in this litigious industry, Steve gets busy. On advice from counsel, he sets up an irrevocable dynasty trust for his wife, children and grandchildren using the Nevada more protective trust laws. Using his generous $12.06 million federal gift tax exemption, Steve transfers the title of his house to a single member LLC and then deposits the LLC interest into the trust. Then he rents the house from the LLC at fair value rent.
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This LLC/trust strategy removes the value of the home from his gross estate for estate planning purposes. And more importantly, he becomes a tenant (not an owner), so the home will not be at risk in case of an unforeseen lawsuit.
After doing this, Steve feels secure that his business can continue breaking new ground while protecting his existing estate from future misadventures.
What Happens When Lawsuits Crop Up
As time goes on, Steve’s company ends up having to recall a defective product, and lawsuits ensue.
While his business takes some hits, the significant equity in Steve’s personal residence is safe because he established a legal entity separate from himself and his business that could not be liable for the business’s legal claims. Litigants considered attacking the trust, but after determining that road would be expensive and uncertain, they decided against it. Steve was able to avoid the personal liability of the lawsuit with a very modest monetary settlement instead. So, his home was never at risk.
Are You a Candidate for the LLC/Trust Lease-Back?
If you reside in a state with a modest homestead exemption from judgment creditors and wish to protect the equity in your home from future lawsuit judgment creditors, you are likely a candidate for the LLC/Trust lease back strategy.
For example, California limits the protection of home equity to the greater of 50% of the medium value in your community up to a maximum of $600,000. There is no protection for equity in a second or vacation home.
To learn more, please view our video, Protecting the Equity in Your Residence (opens in new tab).
This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.
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