Protecting Your Personal Residence with a Trust
Wednesday, 18 May 2016
by Brendan Bybee, JD MPA
Last month, I wrote about protecting your home in an LLC. This post adds to that discussion, presenting another approach to protecting your most important asset. Whether you live in a castle or a cottage, your home has sentimental value in addition to its value as shelter. Protecting what is often your most valuable single asset can be challenging, especially when it is also your most likely source of personal injury liability. Like LLCs, trusts are used to remove property from your personal ownership in order to provide protection. Trusts, however, have their own unique strengths and weaknesses.
To review in brief, when considering strategies to protect your home you must consider threats against property from inside claims and from outside claims. With regard to your house, an inside claim refers to liability arising from the asset itself, like a claim against your house for an injury that occurred to another on the property. Outside claims would refer to threats to your home ownership arising from your personal liability, such as a judgement against you arising from a malpractice claim or a car accident you were involved in.
Certain types of irrevocable trusts are commonly used for asset protection. These trusts, often referred to as “asset protection trusts,” work by removing certain property rights from your control and vesting them in a trustee. With these trusts, you may retain the beneficial interest in the property as a beneficiary of the trust but you cannot control the distribution of those benefits. For example, if cash is contributed to this kind of trust, you, as the beneficiaries, are the only ones who can benefit from the contributed cash. However, you cannot control when and how those distributions are made. Only the trustee can do that. That limitation is what provides the protection. Outside claims, do not reach the property because the assets are not legally under your control. Contributing your home to a trust like this can allow you to continue living in your home while keeping it protected from your personal liability.
This strong protection from outside claims sets trusts apart from LLCs. Your personal liabilities can cause your LLC interests to be encumbered or divested because you own them. On the other hand, a properly formed and managed trust should be entirely immune from your personal liabilities.
Because you no longer own or control the property, holding your residence in this kind of trust also protects your other assets from inside claims arising from injuries occurring on the property. Because the trustee has legal title to and control over the property, the trustee is responsible for the condition of the property and is liable for claims against the trust arising from the property. Under Utah law, your trustee is personally liable “only if the trustee is personally at fault.” This means that your trustee can be held liable for both intentional or negligent action or inaction regarding the property that results in an injury. In most cases the assets of the trust will be available to satisfy any judgment, similar to the result if the asset were owned by an LLC. However, if the injury is well beyond the value of the property, your trustee could then be liable if the property is underinsured.
Use of an irrevocable trust to protect your home is a well-established practice and a good fit for many who are concerned about the minimal homestead protections offered in Utah and other states. However, this kind of planning is not the proper subject of self-help legal services. This is sophisticated planning that will require education and support in addition to properly prepared documents. It is also critical to remember that use of such a trust is only part of the equation. Any comprehensive strategy will include consideration for proper insurance to protect your home and your trustee, including the reevaluation of existing insurance to ensure that it protects the proper interests after a transfer of title. Once things are properly organized, though, life pretty much goes back to normal except that you just may sleep a little better at night. If you have questions about whether this strategy might work for you we are happy to schedule a free consultation.
This information is made available by Spaulding Law for educational purposes only and not to provide legal advice. By using this website, you understand that there is no attorney-client relationship between you and Spaulding Law, unless you have entered into a separate representation agreement. This information should not be used as a substitute for competent legal advice from a licensed professional attorney.