Protecting Your Personal Residence with an LLC
Monday, 11 April 2016
by Brendan Bybee, JD MPA
Your home is much more than merely your castle. It is a place where memories are made and stored and protecting and preserving one’s home is a universal concern. Homestead laws have been enacted in many states expressly to preserve your home against your creditors when things go awry. Due to Utah’s paltry homestead exemption (protecting a mere $30,000.00 in equity, or $60,000.00 for joint owners), many residents have to look elsewhere to ensure their home is safe. This post will discuss one possible option and its limitations.
General Asset Protection Considerations
Asset protection strategies have to consider threats against property from two different sources; inside claims and outside claims. Inside claims concern liability arising from the asset itself, like a personal injury claim against real estate on which an injury occurred. Outside claims concern threats against property owned by the responsible party but arising from injuries unrelated to the property; like a claim against your house made by someone injured in a car accident you were involved in.
Strengths and Weaknesses of Holding Your Home in an LLC
LLCs are ideal vehicles for containing liability producing assets. This is why we often recommend them to our clients for holding rental properties. When a person is injured on rental property within a properly created and managed LLC, their “inside claim” is limited in recovery to the assets of the LLC. The claim is contained and does not extend to personal assets of the LLC owner.
This is why LLCs were created; to encourage business activity by containing the risk involved in new business ventures to the assets of the business. A basic requirement of an LLC is that it have a “business purpose” and the protections only apply if the LLC is treated as a business. Mingling business and personal activity jeopardizes liability containment and could render your personal assets subject to inside claims against your LLC. For this reason, there is some risk to using an LLC to protect your personal residence. Even with a rental agreement in place it may be hard to convince a judge that your LLC serves a legitimate business purpose.
Another limitation of LLCs is that they are not entirely protected from outside claims. Your LLC interest has value and if a claim is brought against you personally, your LLC interest is not shielded from your personal liability. A creditor’s primary form of recovery is the charging order; essentially a lien against your LLC interest in the amount of the debt. In Utah, a creditor may even foreclose on your LLC interest and gain ownership over the entire financial value of your LLC interest. However, because creditors usually have to wait for the LLC to distribute profits they are often more reluctant to seek recovery from your LLC assets, putting you in a better position to negotiate a favorable settlement. Finally, it’s important to consider potential tax consequences before deciding to transfer your home to an LLC. Specifically, the capital gains exclusion which amounts to $500,000.00 for a married couple, or $250,000.00 for an individual. Depending on the arrangement of the LLC, this sizeable exclusion can be lost if you ever need or want to sell your home.
In spite of the weaknesses, many people do hold their residence in an LLC and have enjoyed the protections described above. It’s also important to know, however, that an LLC should not be considered as your entire protection strategy but, rather, as an element of a comprehensive strategy. The first step is regular property maintenance to limit the risk of negligence claims, second is maintaining adequate insurance, after that, a properly formed and maintained LLC is helpful to contain liability for inside claims and protect against outside claims. Don’t think, however, that an LLC is your only alternative to the homestead exemption. In future posts, we will discuss other strategies for protecting your residence.
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.