A high net worth and financial stability are the rewards for a successful real estate investor. However, the real estate investor with free and clear real estate holdings is susceptible to significant loss in the event of a lawsuit and is a prime target for even a frivolous attack.

In recent years, the lending industry has reinstated home equity lines, or HELOC loans. For the free and clear owner of the property or the owner of high equity, the HELOC loan can be an effective tool to discourage a lawsuit. When a loan is established, a deed of trust is recorded for the maximum amount of the HELOC loan, even if the borrower has not withdrawn any cash principal. To a Plaintiff’s legal counsel, looking at the investor’s financial prowess and real estate equity, it appears that the investor is heavily leveraged with little or no equity to attack. This may discourage any further action against the Investor.

In addition to the HELOC, a limited liability company or holding company can be established as a “safe haven for cash.” This legal entity has only one function: to hold cash. It is not engaged in holding assets or operating a going concern, it simply hangs on to cash. Once all HELOCs are in place, in the event a lawsuit is filed, the owner transfers all of the equity to Safe Haven LLC by writing checks for the maximum loan amounts and then sends the resulting cash to Safe Haven LLC. As discussed in Investor Asset Protection-Part 1, the use of Limited Liability Companies is an effective tool to render yourself anonymous to predators who would separate an Investor from his or her wealth. An effective plan employs numerous layers of protection, including liability insurance, debt, and legal structures.

While investment-grade real estate can be protected through LLCs and debt, personal residence presents a different set of challenges.

Personal residence can be protected using a combination of land trusts, indebtedness, and homestead exemptions. The homestead exemption allows you to protect a minimum amount of assets regardless of the circumstances, and each state sets the amount of the exemption. Private residences may have some type of indebtedness before being placed into a Trust. The level of restrictions placed on the beneficiaries of the trust will partly determine how successful an attack on the trust will be. As an example, an irrevocable trust is almost impossible to attack, while a revocable trust may experience less protection of your assets.

The advice of an experienced Asset Protection attorney is recommended if you have significant real estate assets that are susceptible to attack. The article should not be used as legal, accounting or business advice and is not offered as such. Contact your attorney and receive a full review before employing any of the techniques found in this article.