Personal Residence Trust

As a trust lawyer, I have seen some changes over the years. The new targets or the new Deep Pockets are those who have saved up some money for retirement, those who operate a successful business, and those who own a home or have some rental property with any equity. This number is a lot less now than it used to be. Real estate and stock markets have crashed. Many have lost their jobs and their businesses. Those who have survived are vulnerable because their savings are now even more valuable to them. The estimates are that there are more than 100 million adults in the population, and 30 million have mutual funds, savings, and a few even have some equity in their home. That’s 30 million people with something valuable to lose.

THE NEW DEEP POCKETS

The Finemans of the world don’t get sued, and they don’t have to spend their time, energy, and money defending a case. They don’t get sued because they don’t have any money or anything worth taking. Aunt Ellen, who bought him the car as a gift, got sued because she had some money. She was the one who lost her home and all of her savings because she was the Deep Pocket. A lawyer’s job is to tie a party who has some money into a case so that he will get paid. A successful lawyer is one who can create a clever new theory of liability so that someone with money or insurance will be found legally responsible. Even if our common sense tells us that this Deep Pocket had nothing whatsoever to do with the injury, a judge or jury or court of appeals will decide a case based upon their own view of what is fair and rational.

A doctor prescribed antihistamines for a patient with an allergy. The patient ignored the warning label about driving while taking the medication and caused a serious auto accident. The patient had little insurance and few assets, so the doctor was sued. The plaintiff’s lawyer successfully argued that the doctor should have known that the patient might drive his car while on the medication. The jury found the doctor liable for $6.2 million in compensatory damages. The doctor’s malpractice insurance didn’t pay a nickel of the claim since the policy only covered claims by a patient—not those injured by a patient.

Was the doctor really at fault here? He lost everything he owned, and he didn’t do anything wrong. The mistake he made was not realizing that as a physician, and as someone who had a home and some savings, he was an inviting and vulnerable target for a lawsuit.

WHY YOU SHOULD CONSIDER A PERSONAL RESIDENCE TRUST

A Personal Residence Trust is a good strategy to provide asset protection for the family home.   Generally, our goal with a Personal Residence Trust is to protect the equity in the home, above the homestead amount, while preserving the tax benefits and the continued right to use and enjoy the house. That’s what most people want to accomplish.

To understand the key issues involved in protecting the family residence, let’s review the tax issues which may be involved. Some trusts are treated by the tax law as if they do not exist. This type of trust is known as a “Grantor Trust,” and if certain language is used in the trust document, the IRS will treat you as the owner of the property, not the trust. That’s good, and it is what we want for our purposes. We want a legal trust that is respected for protection purposes but that is ignored for taxes. That way we are assured that we’ll retain all the tax benefits. So, our first requirement is that the trust we use is treated as a “Grantor Trust.”

Once we have solved the tax problems we can consider the asset protection issues. To achieve worthwhile protection for the residence, it is important that your legal rights concerning the house are limited in some manner. If you maintain the full spectrum of ownership rights, it is likely that a judge would order you to turn over the property to a plaintiff with a judgment against you. In other words, to the extent that you have unrestricted power to do anything you want with your home, it can be seized in a collection action.

The key to protecting the home is to limit your rights in some manner so that there is nothing legally available, which can be reached. If your ownership of your home changes from full and complete to something less, your interest may have no value to a prospective creditor.

How should we limit your rights in an acceptable manner? We say acceptable because it is certainly easy to fully protect your home if you want to give it away to your children and not live there anymore. That’s perfect asset protection, but in most cases, it would not be a satisfactory solution. Maybe we can accomplish what we want using less drastic measures.

Protecting Your Home From Lawsuit Risk

For most people, the family home represents the largest source of wealth and personal savings. In many parts of the country, dramatic increases in housing prices has made real estate the new investment of choice over the stock market and other traditional vehicles. Clients are now coming to us with substantial equity in their residence and many now own one or several vacation homes and rental houses.

Free Consultation with a Trust Lawyer

When you need help with probate, estate planning, or to have a trust drafted, call Ascent Law for your free consultation (801) 676-5506. We will help you.