I have had many new clients tell me that their prior attorney had “protected” their home by placing it into a family limited partnership (FLP) or a limited liability company (LLC), with Husband, Wife and children as members. Is that sufficient? Will the FLP or LLC protect their home?
My answer is No! FLPs and LLCs are business or investment entities. The home is neither. It is a personal asset. To turn it into a business or investment asset rent need be paid. However, as rent would not be tax-deductible to you, and it would be income to the FLP or LLC (and K-1’d back to you), paying rent causes you additional tax.
To protect a home: (1) a single person LLC (disregarded entity), (2) equity stripping, or (3) a post-nuptial agreement may be used.
Let's discuss these.
Single Person LLC (disregarded entity)
A disregarded entity is an entity that holds legal title to property, but is not required to file an income tax return. It is a business entity (as defined in Reg. 301.7701-2(a). It is disregarded as an entity separate from its owner for Federal tax purposes. “A business entity with only one owner is … disregarded; if the entity is disregarded, its activities are treated in the same manner as a sole proprietorship…”.
A single person LLC is a title holding vehicle which is an LLC for asset protection purposes, but is “disregarded” for tax purposes. As such it can be used to protect your home.
Equity Stripping
Equity Stripping involves purchasing your FLP or LLC interests for cash, plus a promissory note. To be certain you will pay your Note, the FLP/LLC places a secured interest (a trust deed) on your home. Provided, as with a bank loan, payments on your Note are made regularly, the trust deed is a lien on your real estate prior to a creditor, and therefore provides asset protection.
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Post-Nuptial Agreement
A Post-Nup is similar to a pre-nup, except the parties make the agreement after they are married. Post-Nups are authorized by the California Family Code (CFC), and by similar legislation in most states. Post-nups enable married couples to allocate their property and income as they see fit. To be valid a post-nup must be in writing, signed by both parties, accompanied by full disclosure of all assets, income and debt of both parties, be free from fraud and duress, and entered into freely after the parties have had ample opportunity to consider its contents, and obtain legal advice (should they so wish) before signing.
CFC §850: “[M]arried persons may by agreement…with or without consideration…: (a) Transmute community property to separate property of either spouse. (b) Transmute separate property of either spouse to community property. (c) Transmute separate property of one spouse to separate property of the other spouse.”
CFC §852. “(a) A transmutation of real or personal property is not valid unless made in writing… (b) A transmutation of real property is not effective as to third parties without notice thereof unless recorded.”
Although a post-nup is generally more costly to initially set up, it neither requires a yearly tax return, nor does it require an $800/year payment to the California Franchise Tax Board (or similar entity costs to your state taxing authority). In most situations, I advocate a post-nup over a single person LLC or equity stripping.
A post-nup changes the partners marital status, and, as such, is better understood and appreciated by the trier of facts. To many, an equity strip is something contrived. The parties still own the assets, and their own entity, an entity they fully control, has placed a lien on it
In cases where there is considerable equity in the home and where the wife is a stay at home mother, I will, via the post-nup, give the home to the wife as her sole and separate property, and give the business to the husband. I will then have the wife further protect (double protection) the home by her placing it into a one person LLC
I would appreciate thoughts you may have concerning asset protecting the home. Please send them to me, Alan Eber at AlanEber@AssetProtectionLaw.com.
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