Protecting Your Home from Lawsuits with a Dynasty Trust
An irrevocable dynasty trust can play a valuable role in keeping the valuable equity in your home safe from personal and business-related lawsuits.
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.
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
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.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
Jeffrey M. Verdon, Esq. is the lead asset protection and tax partner at the national full-service law firm of Falcon Rappaport & Berkman. With more than 30 years of experience in designing and implementing integrated estate planning and asset protection structures, Mr. Verdon serves affluent families and successful business owners in solving their most complex and vexing estate tax, income tax, and asset protection goals and objectives. Over the past four years, he has contributed 25 articles to the Kiplinger Building Wealth online platform.
-
Setting Objective Criteria for Employee Bonuses Aligned With Company Goals
When employees win, the company wins.
By Stephen Nalley Published
-
A Modern Guide to Money Etiquette: Gifts, Tips, Splitting Bills and More
What is modern money etiquette? The customs for splitting a restaurant check, purchasing a wedding gift, tipping and more have evolved. These guidelines can help.
By Emma Patch Published
-
Potential Ripple Effects of Taxing Unrealized Capital Gains
The proposed tax on unrealized gains would be limited to those with a net worth above $100 million, but some see a broad impact on markets and businesses.
By Brian Skrobonja, Chartered Financial Consultant (ChFC®) Published
-
Succession Musts: Thoughtful Planning and Frank Discussions
When it comes to passing on the family business, you don't want anyone to be surprised about who will control or inherit the business after the owner's death.
By David Handler, J.D. Published
-
Here's How to Find Your Way Out of the Inherited IRA Maze
To navigate complex rules on inherited IRAs and RMDs, start by breaking down key terms and common scenarios. A clearer picture of your next steps will emerge.
By Evan T. Beach, CFP®, AWMA® Published
-
Should You Move Your 401(k) to an IRA Once You Hit 59½?
Some 401(k)s allow for in-service withdrawals at age 59½, opening up greater investment options. Here are three reasons for taking the plunge.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
When It Comes to Insurance, How Much Risk Can You Take?
Either you or an insurance company takes on the risk of protecting your belongings from loss or damage. Can you afford to self-insure?
By Karl Susman, CPCU, LUTCF, CIC, CSFP, CFS, CPIA, AAI-M, PLCS Published
-
Five Ways to Minimize a Higher Capital Gains Tax Rate
With Harris’ proposal to raise the capital gains tax rate (which would require congressional approval), investors might want to consider tax-lowering options.
By Michael Aloi, CFP® Published
-
Collar Investing Strategy Can Help Protect Your Nest Egg
Here are some key considerations for using the collar strategy of put options and covered calls to safeguard your wealth in retirement.
By Matt Amberson Published
-
Understand Your ESOP Benefit: The Diversification Option
You can sell your shares back to the company during your employment years, called diversification in ESOP terms. What are the pros and cons?
By Peter Newman, CFA Published