Asset Protection

Crafting a Real Estate Asset Protection Plan

By
Dominion
Updated:
October 9, 2023
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8 min read
Contents

Real estate is potentially the most important asset you own. That’s especially true if, as a high net worth individual, you also own real estate not just for yourself but for investment purposes in different states or different countries.

In the event of aggressive litigation, however, you might find that real estate is vulnerable to being taken. Knowing how to craft a real estate asset protection plan is vital, but there are a lot of hurdles you can encounter and many mistakes you can make on the way to true security.

Just Own the Property Under an LLC – Done, Right?

Wrong.

This strategy – making an LLC, then purchasing property under the LLC so the company owns instead of you – is one of the most common means of real estate asset protection. Unfortunately, it’s not nearly as effective as many individuals think.

In truth, an LLC doesn’t protect you from aggressive litigation whatsoever. Imagine a scenario where a surgeon is sued for alleged malpractice. The plaintiff wants to go after the defendant’s real estate holding. While the surgeon in question has a primary residence they live in, they also have an investment property owned by an LLC that they control.

That property will not be protected at all. It will be trivial for any motivated court or litigator to go after that property and force the surgeon to give it up, even if it is truly owned by an LLC. A limited liability company by definition limits your personal legal liability in certain cases – it doesn’t necessarily protect the assets that you own from that limited liability company.

On top of that, lawyers are easily able to show that your LLC assets and personal assets are essentially mixed together. One slip up on your end – from using the business credit card for a small personal purchase to using the company car for personal travel – is enough to “pierce the corporate veil” and show that you and your LLC are, for all intents and purposes, the same entities.

In fact, you can think of an LLC as a wet piece of paper for all the defensive good it will do you. Actual, comprehensive, effective real estate asset protection is about much more than owning your real estate investments under a company you control or are a part of.

Okay, So How About Setting Up a Domestic Trust?

You might think about another common real estate asset protection strategy: setting up a domestic trust and owning the real estate assets through that vehicle.

Unfortunately, a domestic trust has the exact same problem as an LLC. A sufficiently motivated creditor can come after any properties under that domestic trust and get you to surrender them under a court order. A judge will not blink twice about acquiring real estate under a domestic trust if they find that you are liable for damages or other payments.

If an LLC is a wet piece of paper, a domestic trust is two wet pieces of paper. It won’t take a creditor or judge very long at all to tear through those barriers and get your assets. There are lots of circumstances in which real estate protected in a domestic trust could be at risk, such as:

  • Bankruptcy
  • Tax debt
  • Any other sufficiently large debt
  • Legal fees

Bottom line: if you are being sued or your assets are at risk, and they are protected by either a domestic trust or LLC, they are vulnerable. Don't expect them to stay in your possession if you’re attacked by a legal opponent.

Owning Property Under a Foreign Asset Protection Trust

Okay, you might say. But there are other types of trusts you can rely on. What if you purchase property and own it under a foreign asset protection trust or APT?

A foreign or offshore asset protection trust might look effective on the surface. In reality, however, it is still not very protective (to keep the analogy going, imagine it as being as protective as 100 pieces of wet paper).

A foreign or offshore asset protection trust stores your assets in a place other than the US (or whatever your home jurisdiction might be). At first glance, this could seem to be effective because the trust by definition doesn’t have to abide by the laws and regulations of your home jurisdiction.

At least, that’s what many high net worth individuals think. That said, judges, creditors, and other motivated actors can still navigate the intricate web of bank deals, subsidiary branches, and international agreements to get at the assets you store in foreign asset protection trusts if you aren’t careful.

This is much less likely if you have a strict, very defensive, Dominion-style asset protection trust. If you’ve done your due diligence and relied on the advice of expert financial advisors, and your foreign asset protection trust is:

  • Set up in a jurisdiction that doesn’t have connections to other jurisdictions
  • Designed to prevent you or any other motivated actor from getting at the assets until the appropriate time

… Then a motivated litigator will indeed have a very hard time acquiring those real estate assets secured within. But that doesn’t mean that they can’t get to them eventually.

Even if You Follow the Rules of Asset Protection Trusts, Real Estate Can Be Vulnerable

Note that all of the above is true even if you follow all the rules of setting up good asset protection trusts. These rules include:

  • You correctly appointed a trustee that was not yourself (this is the default in an irrevocable trust anyway)
  • And you correctly did NOT appoint a protector who is you or your family with control over the trustee
  • The trust doesn’t say the settlor (you) can replace the trustee under certain conditions (which could open up the trust to being compromised under a court order to the settlor)
  • You have multiple beneficiaries for the trust, not just yourself (which could otherwise indicate that you set up a trust for specific real estate asset protection against litigation or other payments)

Such an asset protection trust would indeed be a very tough nut to crack for a plaintiff, judge, creditor, or anyone else. But it could all go to waste if you break the one big rule of real estate asset protection: living in the property as if you own it.

The Big Weakness in Real Estate Asset Protection: Living in Property

In most real estate litigation cases, whether or not the defendant in the case lives on the property is a huge factor in the overall decision. After all, imagine a circumstance where you own a property under an LLC. You're a filmmaker, and you use the property as a place to cut your films and do other film-related work. 

However, because your job takes up so much of your time, you also effectively live there five days out of the week or more.

If someone were to sue you, they could come after that property. That’s because, in effect, you are using that property as your home or residence, not as a business office like your LLC might claim. How things look in effect is just as, if not more, important as what they are said to be on paper.

Think you can own a home and live in it 24/7, but put it in a trust and rest assured it's protected? Think again. No matter how a trust is set up, your home jurisdiction can probably come after the property if you live in it or act as though you live in it as a residence. This is especially true in America.

Here’s another example. You own an investment property in New Zealand. While you don’t live there 24/7, you do occasionally use it as a vacation home. Alternatively, maybe you let family members stay in that investment property and have their own parties there. 

Any of these actions could be discovered by the court in a legal investigation and used as evidence that you utilize or previously utilized the property as a residence (i.e., you own it, so it’s an asset that a creditor can come after).

How to Set Up Effective Real Estate Asset Protection

So, does that mean real estate asset protection is a lost cause? Not exactly.

Crafting a real estate asset protection plan just requires more than putting together the right documents. It requires modifying your actions and your lifestyle in some cases.

The only real way to set up true real estate asset protection is to:

  • Genuinely not own the property AND…
  • Genuinely do not act like you own the property

These are two separate things! So it’s important to keep them in mind.

You can accomplish the first requirement in a variety of ways, many of which are listed above. For example, if you have the property in an LLC or trust, you technically don't own the property and, provided you fulfill the second requirement, that should be good enough for most legal actions.

The second requirement is more difficult, especially for high-net-worth individuals who don’t have as much or any experience in real estate asset protection.

As an example, you can set up a rental agreement with your protected property, meaning you rent it out to a tenant and you don't live there. Alternatively, you could keep track of where you stay and where you live very carefully. Then, if the court asks for your records, you can prove that you didn't stay at the property in question for any meaningful amount of time.

Put another way, as soon as you can establish that you don’t personally own the property and you don’t act like you live in the property, it will be almost impossible – if not truly impossible – for someone to come after it or make the argument that you in effect own the property.

There are lots of ways to set up a trust or structure a vehicle to make sure you don’t lose money. But when it comes to real estate asset protection, the way you behave with the property determines whether your assets are actually protected or if they are just protected on paper.

Your Choice of Trustee is Paramount

Because of this major factor in real estate asset protection, your choice of trust trustee is absolutely vital. In situations like this, your trustee can’t just oversee the trust and ensure that assets are distributed if and when the time comes.

Your trustee plays a much bigger role since they have an additional fiduciary duty: they need to ensure that the trust is set up correctly and that you operate within the bounds of the trust properly at all times.

Most trustees just have to set you up with a trust and ensure the paperwork is drawn up correctly. However, the trustee for a real estate asset protection trust or some other similar vehicle needs to check in on you, ensure that you understand the bounds of the trust, and provide you with advice or counsel regarding stays, property use, etc.

Even one day of wrongful or inattentive operation could see your property become vulnerable to litigation and attack from motivated parties. Given this fact, picking a good trustee is even more important than you may initially believe.

You need to find a trustee that:

  • Has experience with real estate asset protection trusts and other vehicles
  • Knows the ins and outs of real estate jurisdictional law in both your home jurisdiction and in any other jurisdictions that may affect the trust in question
  • Is willing to work with you and provide sound counsel regarding things like property stays, rental agreements, etc.

The Experts Can Help

Finding a trustee like that might seem a little difficult. But the experts at Dominion can help.

Our trusted, experienced legal advisors will provide you with not just strategies in this arena. We’ll help you plan and implement sound tactics for all other elements of asset protection. Whether that means setting up an irrevocable trust, determining the right jurisdiction for your assets, advising you on legal matters, or all of those things at once, we’re your people.

The more wealth you have, the more people want to take it. Dominion can help you keep it, so contact us today.

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