Don't lose your home in a lawsuit... or waste the equity

As the authors of Wealth Protection, MD and as advisors to numerous physician clients, we are constantly amazed at how few physicians have actually taken the necessary steps to shield their homes from lawsuits. Doctors pay millions in dollars over their careers for medical malpractice insurance coverage and often thousands more to protect some of their assets, yet they still fail to protect their single largest asset. Why is this?

Perhaps many of you believe that your home is protected from creditors or you believe protecting the home means giving it away or incurring expensive legal costs. None of these is true.

Various alternatives Before we examine what we feel is the ideal way to protect your home and build wealth, we need to examine alternative strategies for protecting the home. In our practices, we have used each of these alternatives at various times.

While all of these solutions may seem to make sense in the right circumstances, none offer wealth accumulation in addition to the asset protection benefits.

1. State Homestead Law Every state has some type of homestead protection. In most states (like New Jersey, New York, and California), the amount of homestead that is protected from creditors is small relative to the average home price. Only a handful of states (Florida, Texas, Kansas) have strong homestead protections. In those states, homestead protection can be relied upon for asset protection in some circumstances, but the equity in the house is not "working for you." The house will appreciate in value at the same rate whether you have 1% or 100% equity in the home.

2. Tenancy by the Entirety In a minority of states, you can file to title your home as Tenancy by the Entirety (T/E). Theoretically, only a creditor who has a claim against both you and your spouse can take the home if it is titled this way. This can give a false sense of security for a few reasons. First, there has been a case when a litigant successfully penetrated T/E and took a home from a couple because the couple had at least one joint creditor (it was a credit card with both of their names on it). Second, if a creditor arises from real estate that is owned by T/E or a lawsuit is filed against you and your spouse because of an act of your children or tenants, you will both be named. In these cases, T/E will not provide any protection. T/E could protect your home from a malpractice judgment, but the risk of having T/E penetrated AND the fact that the equity in the real estate is still not "working for you" make this an undesirable alternative.

3. LLCs and FLPs Limited Liability Companies (LLCs) and Family Limited Partnerships (FLPs) are solid asset protection tools for most liquid assets, business equipment, and as the first part of an asset protection plan for rental real estate. LLCs/FLPs also offer some wonderful income and estate tax planning benefits. However, both of these benefits pale in comparison to the tax costs of putting a primary residence into an LLC/FLP.