In the field of wealth protection, there are a myriad of purported strategies that have been put forth to shield real estate from future creditor claims. During our 45 years in practice, we’ve become familiar with all of them.
However, only one stands out as truly effective: make your real estate “not worth going after” in a creditor’s eyes. How do we do that?
Here’s an example: say your real property is worth $1 million, but you have borrowed $950,000 from an independent lender (95 percent of its value) against that property, and given a recorded lien to the lender as security. You continue to collect rents and otherwise operate your property in the same manner as before the loan structure was implemented. What did you do with the loan proceeds? You have contributed the $950,000 loan proceeds to your wealth preservation offshore trust. Subsequently, you are sued by a creditor. Your cash (including the loan proceeds) and securities are already protected in your offshore trust, but your real estate is still here in the U.S. The creditor wins the lawsuit and seeks to collect the judgment, but the only asset you have in the U.S. is the real estate. Since the lien holder (the lender) always gets paid first in a forced or voluntary sale, that only leaves 5 percent for any other claimants to fight over. Thus, if the creditor considers the court costs and attorney fees involved in liquidating the property (to collect the judgment), your property has become “not worth going after”, and, you are in the driver’s seat in negotiating any settlement.
Crucial factors in order for this strategy to be effective: First, the lender must be totally independent – you cannot use a friend, family member, your trust, your company, or any other close party – it just will not work – consider how it would look to a judge. Second, the loan proceeds must be held offshore in a protected structure (usually a properly structured wealth protection trust, but see this article for an alternate offshore structure for the loan proceeds: https://protectyou.com/2017/04/protecting-real-estate-without-an-offshore-trust-now-it-can-be-done/ ).
The time to protect your property is before any storm clouds start brewing on the horizon – these arrangements absolutely have to be made before there is a creditor’s claim against you. Once someone has already filed a claim, the independent lenders won’t approve the loan described above.
It is important to note that all wealth preservation trusts are NOT created equal. Our trust documents and this loan strategy are the products of decades of implementation, experience, development and “fine tuning,” so absolutely nothing is left to chance. The most important factors to consider in hiring a law firm to implement an effective asset protection structure for you are the experience and the qualifications of the lawyers.