Irrevocable trust for primary residence

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Index guy
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Irrevocable trust for primary residence

Post by Index guy » Wed Jan 17, 2018 9:32 am

I would like input on the pros/cons of placing my primary residence in an irrevocable trust for my personal situation. I understand this is not often a recommended strategy for everyone. My primary purpose of doing this is asset protection (i.e. to sleep better at night knowing nobody could ever take a home away from me).

My family resides in a home valued between 450k-500k. From what I understand, our state homestead exemption would allow my wife and I to have up to 250k in protected equity. There is no option in our state to title the home as "joint owners in entirety", or whatever is the best way for asset protection.

My motivation is that both my wife and I are physicians. Neither of us (at least from what I know now) is in immediate threat of lawsuit, and we both have typical malpractice coverage (1 mill occurrence/ 3 million total), and personal umbrella policies. However, there is always fear of a malpractice suit over the course of a career, at least for one of us.

I know malpractice claims exceeding policy limits are rare. However, I am exploring the option of an irrevocable trust. For the added asset protection, what are the drawbacks? How would it restrict moving to a separate town in future years if we wanted to? What are the costs? We also have 2 young kids (as of now) that we would like to pass the house to someday

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neurosphere
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Re: Irrevocable trust for primary residence

Post by neurosphere » Wed Jan 17, 2018 1:21 pm

Are there any malpractice award limits in your state? How much would it cost to buy extra malpractice and umbrella insurance?

What are the laws in your state regarding protection of your home or other assets in the event of civil litigation and/or bankruptcy? You may get to keep your home, but you may not get to keep any items or furnishings. So "sleeping better at night" because you didn't lose your home may mean sleeping on the floor.

IANAL, but just throwing out some points to think about.
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Index guy
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Re: Irrevocable trust for primary residence

Post by Index guy » Wed Jan 17, 2018 4:18 pm

I do not know of any limits set on malpractice, but it is admittedly rare for awards to go over the policy limit of a physicians insurance (typically 1 million for a single case).

I dont think there is any way to purchase more malpractice insurance, and we already have 2 million dollar umbrella policies.

I feel adequatly insured and in no immediate danger of a malpractice claim, I'm just trying to find out the "why nots" of going with an irrevocable trust. If I knew I could protect all of that home equity, I might throw more money at the house over the next year or two as opposed to contributing to my taxable brokerage account (still maxing out retirement accounts of course).

afan
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Re: Irrevocable trust for primary residence

Post by afan » Wed Jan 17, 2018 4:48 pm

I am not a lawyer and not any kind of expert on asset protection. I can give you my impressions from having looked into it somewhat.

I think it would be difficult for this to work. One principle of asset protection trusts seems to be that they work best when the grantor (person who created and funded it) routinely derives no benefit from it. They work better when someone can put in money and NOT spend it unless or until the sky falls in on them. If they were routinely taking money out I am sure a plaintiff's attorney would claim that there was no trust, this was just Doc X's money and available for lawsuit. If you are living in the house then you are taking value from the trust all the time.

Several states have created laws to permit asset protection trusts and compete with foreign jurisdictions for that business. It is not at all clear how well these domestic asset protection trusts work. They usually require that the trustee be a resident of the asset protection state, or, more commonly, the trustee is a bank or trust company in that state. There are lots of arguments among lawyers about whether creating a trust in one state would protect the assets of someone who lives in a different state.

There seems to be less argument about real estate. You cannot move your house to an asset protection state. No matter how the title was listed the house is in your home state and if you lose a lawsuit the court can get control over your house.

Even for intangible assets lawyers speculate that domestic asset protection trusts (trust and trustee are somewhere in the US) are weak protection because they are subject to US law. If the state where the lawsuit is filed is not friendly to domestic asset protection trusts it may do you no good to have Alaska or Nevada saying your trust is protected. Your problem is what the courts in your state have to say about it. Lawyers talk about things like "conflict of law", when there are multiple states involved. State A does not have to honor the judgments of courts of state B if doing so would be incompatible with strong public policy of state A. If there are any lawyers reading, please correct, rather than cringe at my attempt to refer to this. Lawyers also talk about which law governs a situation. Grantor lives in state A, the asset being protected is in state B and grantor is being sued in state C. Where is the case heard?
What if the states cannot agree on the protection of the trust? And of course if you are forced into bankruptcy under federal law then there is not a state where you would be protected.

For all of the above reasons, if you want to do asset protection, real estate in the US would be the LAST thing to try to protect. If you have money you can put in trust then that could be more practical. Creating a domestic asset protection trust is cheaper than a foreign trust, but speculated to be less reliable. If worse comes to worse a foreign trustee can simply refuse to honor the judgment of ANY US court. that is not an option for domestic trusts.

If both of you are at about equal risk of malpractice suits then one other move would not work. Often Spouse A, who is the one with exposure, would create a trust for Spouse B and the kids, but not Spouse A. If Spouse A were sued the plaintiff could take everything they could from Spouse A, but Spouse B would still let A live in the house (paying all the bills, buying food, etc). I don't think it would work for each spouse to create a trust like that. The courts would disregard the trusts and say this was an obvious ruse.

If you don't have tenants by the entirety protection or homestead protection for your home and you don't have enough financial assets to put into a domestic or foreign trust protect yourselves then you have few options. You apparently have as much malpractice insurance as you can get. You may want considerably more umbrella insurance (the difference in premiums between $2M and $10M is likely to be less than one hour of the time of an estate planning attorney). Then meet with such an attorney and go through what limited choices you have. Warning. There are some attorneys who make a lot of money setting up trusts dishonestly and apparently making unrealistic promises about how they will work. You seem to be aware of some of the issues, so be careful.

I will mention again that I am not a lawyer. If there are lawyers reading, please correct my misunderstandings.

Your best maneuver might be to move to a state with stronger limits on malpractice suits, more debtor protection or both.
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pintail07
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Re: Irrevocable trust for primary residence

Post by pintail07 » Wed Jan 17, 2018 5:40 pm

If a third party owns the house, if you still reside in the house I would think you would have to pay an arms length rent. I may be wrong but seems that way to me.

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dm200
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Re: Irrevocable trust for primary residence

Post by dm200 » Wed Jan 17, 2018 6:00 pm

Don't know, but what if you got and maintained mortgage loan(s) to the maximum possible on the home (no matter who owns it). Then, use other asset protection techniques for the proceeds.

Then, there is little, if any, value to those successfully suing.

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BolderBoy
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Re: Irrevocable trust for primary residence

Post by BolderBoy » Wed Jan 17, 2018 6:49 pm

What state do you live in?

My gut impression is that doing this with your residence is a waste of effort. If a plaintiff's attorney is coming after your personal assets then s/he is likely going to seek garnishment of your income going forward as well. Your only escape would be to flee the country.

I've only read about such aggressive plaintiff's attorney moves against physicians in very egregious cases and if the one physician I'm thinking about didn't end up in prison he would have surely fled the country (notorious Nevada case involving a gastroenterologist). In another Oregon case in which the plaintiff's attorneys (multiple lawsuits) sought to take EVERYTHING the physician owned, they got it and he fled to Australia.

IANAL.
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Tachyon
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Re: Irrevocable trust for primary residence

Post by Tachyon » Wed Jan 17, 2018 8:25 pm

IANAL

I think this would be counterproductive or more headaches than it's worth.
Umbrella does not cover medical malpractice or other professional liability.
If you want to specifically protect the house, providing you own the house free and clear, just take out a HELOC against the house aka "stripping" the equity so that your equity is under homestead exemption.

I'm unsure if you are new to practice. When I first started practice, I was completely anal about this stuff. I've also been sued once that didn't help. But after awhile, if I were to look at it objectively, the liklihood of a malpractice taking all your assets is incredibly low, that you'd probably die from a car accident statiscally. Rather, the way I see it, is that I'd spend all my assets defending that possibility appealing it over and over until they decide (if they already wouldn't) to settle within insurance limits.

The few cases that I know about that this happened in, the cases were pretty egregious. As in criminal, and not just your run of the mill malpractice suit.

Katietsu
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Re: Irrevocable trust for primary residence

Post by Katietsu » Wed Jan 17, 2018 8:35 pm

I agree with all of what has been said. Even in larger settlements, individual liability policies may not been exceeded. Instead, the plaintiff has sued multiple entities, eg the surgeon, the anesthesiologist and the hospital.

And this is being contemplated to only protect $250,000. Since garnishment of a lifetime of earnings is a theoretical possibility, how significant is $250,000.

Lastrun
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Re: Irrevocable trust for primary residence

Post by Lastrun » Wed Jan 17, 2018 8:50 pm

dm200 wrote:
Wed Jan 17, 2018 6:00 pm
Don't know, but what if you got and maintained mortgage loan(s) to the maximum possible on the home (no matter who owns it). Then, use other asset protection techniques for the proceeds.

Then, there is little, if any, value to those successfully suing.
Tachyon wrote:
Wed Jan 17, 2018 8:25 pm
If you want to specifically protect the house, providing you own the house free and clear, just take out a HELOC against the house aka "stripping" the equity so that your equity is under homestead exemption.
This has been a long standing approach to protect the primary residence equity. The problem has always been what to do with the loan proceeds. Sort of a "hot potato" problem. One classic was the the offshore equity strip. Offshore friendly jurisdiction bank would loan on house to zero equity. Proceeds of loan placed into CD in offshore bank. Both house and CD were collateral for the loan. CD interest paid bank fees and interest on loan.

afan
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Re: Irrevocable trust for primary residence

Post by afan » Thu Jan 18, 2018 5:46 am

At the extreme an approach that works for people with weaker ties to the US:

Create a foreign asset protection trust and put as much of your money in it as you can. Do not own any US real estate. All your assets would be things you can hold in your offshore trust. That way, if you lose a big case the challenge for the creditor is getting control of those assets since the foreign trustee will not cooperate. The last piece of the puzzle would be to move out of the US to a jurisdiction that will not enforce rulings of US courts. Then the US court cannot jail you for contempt for refusing to pay the judgment.

There are few people willing to take it that far, usually only those who would like to live in one of those other countries anyway. But as best I can tell this would work.

Having a big mortgage only limits the appeal of taking the house, it does not protect the money.

There is a move you could use that inviolves putting the house in trust but I doubt it accomplished your goal. You can create a trust for some unrelated entity, like a charity, give the house to the trust and retain the right to live there for a number of years. You get a tax deduction that accounts for the fact that the charity does not get the house immediately. Once that term runs out then you have to move out and the charity can sell the house.

This prevents a plaintiff from getting the house since you don't own it. But you also have given away your house.

A simple way to avoid having your house taken is not to own one. Rent instead. But you still need to protect your money.

If possible, get excess malpractice liability insurance. Claims above $3 million are not that rare. I have no idea what that would cost but all of these asset protection trust activities are expensive to implement and maintain. It might not be that expensive since the insurers' exposure is only to awards above the underlying coverage.


Maximize your contributions to retirement plans since they enjoy protection from lawsuits. It will be painful from a tax perspective, but do Roth accounts to the extent you can since they never have required distributions.

You could create trusts for your children and make gifts to those. That money would not belong to you and would not be available to creditors. You would have to treat it as "not your money". If you started spending it then the plaintiff attorney would have an argument that you had not really given it away.

I was not kidding about moving. Some states are much friendlier to docs than others. With caps on malpractice pain and suffering awards the likelihood of a judgment above insurance premiums are small. Even if the state is not one of the asset protection states that would make a big difference.
If you live and practice in a creditor friendly state with out of control malpractice awards then getting out may be the best long term strategy.
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Ichabob
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Re: Irrevocable trust for primary residence

Post by Ichabob » Thu Jan 18, 2018 7:05 am

Are you a partner with extended financial liability for the acts of others?

afan
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Re: Irrevocable trust for primary residence

Post by afan » Thu Jan 18, 2018 10:21 am

Setting up trusts for your kids and putting away their college money could protect that. I don't know the asset protection aspects of 529 plans but worth investigating. Four years of private college for two kids adds up to a lot of money. Even more if you plan to pay for graduate school.

That way, if you get cleaned out by a malpractice case you will still have provided for your kids education.
We don't know how to beat the market on a risk-adjusted basis, and we don't know anyone that does know either | --Swedroe | We assume that markets are efficient, that prices are right | --Fama

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