There are a number of things a homeowner can do to protect their home from a lawsuit. We’ll walk you through the most common solutions and when they can be best utilized.
Owning a home is typically seen as one of the most significant personal and financial investments you will make in your life. It’s not only a way to build equity, but also a way to build family memories that will last a lifetime. Unfortunately, there are a number of incidents that can occur on your property that could lead to a lawsuit against you. So what happens when a lawsuit threatens that precious home you’ve worked so hard to attain?
1. Homestead Exemption
A homestead exemption is a property tax exemption available in most states that can protect a home from a lawsuit up to a certain amount of the value of a person’s home from a creditor or bankruptcy. The amount and eligibility for the exemption depends on the state you live in. In some states, every homeowner gets the tax exemption, while in other states, eligibility depends on income level, property value, age, disability, and veteran status. However, every state requires that the home be the primary residence.
Learn more about how property taxes work before deciding whether or not a homestead exemption is the best option for you.
How Does a Homestead Exemption Work?
It’s called a “homestead” exemption because it applies only to primary residences, not rental or investment properties. You must be living in the home in order to protect the home value from property taxes or a lawsuit. Some states base this value on a percentage and others base it on a dollar amount.
If your state uses a percentage method, the exemption will benefit you if you have a more valuable home. If your state uses a dollar amount, the exemption will benefit you if you have a less expensive home.
For example, if the assessed value of your home is $300,000 and your property tax rate is 1%. Your property tax bill would be $3,000. But if you were eligible for a homestead tax exemption of $50,000, the taxable value of your home would drop to $250,000, meaning your tax bill would drop to $2,500.
If you are considering taking advantage of this exemption to protect part of your home value, consult a lawyer and figure out your state’s specific laws to see if you qualify and for how much.
2. Tenancy by the Entirety
Tenancy by the Entirety is another way homeowners can protect their home from a lawsuit. What does this mean? Tenancy by the entirety is one of the ways to hold title to your home that is only available to married couples, and sometimes domestic partners, in certain states.
Simply put, tenancy by the entirety means that if one spouse is sued, the property cannot be attached or divided into two parts in a lawsuit. For example, if a husband finds himself in the middle of a lawsuit that could result in the loss of assets, the wife would be protected from the loss because the lawsuit had nothing to do with her.
There are five conditions that must be met before the spouses can qualify for Tenancy by the Entirety.
- Unity of possession: Spouses have joint ownership and control of the premises.
- Unity of interest: Neither spouse’s interest in the property is higher than the other.
- Unity of title: Both spouses receive title to the property via the same deed.
- Unity of time: Ownership of the property must be taken by both spouses simultaneously.
- Unity of marriage: In most states, spouses must be married at the time they acquire the property, though some states recognize domestic partnerships.
There are approximately 20-25 states with this law. Consult a legal expert to make sure your state offers Tenancy by the Entirety and that you meet the requirements for this option.
3. Equity Stripping
Equity stripping is a strategy designed to reduce overall equity in a property as a way to make properties unattractive to creditors. It typically requires placing a lien on your home but can be a useful way to protect a home from a lawsuit. The equity is ‘removed’ from the home and replaced with a loan. This can be done by a traditional HELOC and makes it difficult for a creditor to challenge this in court.
While it can be a sufficient way for homeowners to protect their homes from a lawsuit, it can be a risky strategy to pursue. There is always a chance that you could still lose the case. If so, you have wasted time, lost money in legal fees, and risk them coming after your other assets.
Equity stripping is also another term for predatory lending. While it’s possible for the method to be a fair and equitable arrangement, it’s also possible for it to be a fraudulent foreclosure rescue scheme.
This can be a useful strategy for some homeowners looking to protect their homes from a lawsuit, but it’s important to be informed and prepared for the downside of pursuing this. Consult with a lawyer before making any decisions regarding your home and home equity.
4. Domestic Asset Protection Company (DAPT)
A domestic asset protection company (DAPT) typically works by placing any property you plan on keeping for life in this type of trust. Common property types include a personal residence, cabin, beach house, or farm. The longer you keep them there, the better protection they afford.
A DAPT will have four features, including:
- Must be irrevocable and spendthrift (controlled by a trustee)
- Must have at least one resident trustee appointed
- Must conduct some administration of the trust in the respective state
- The roles of settlor and trustee must be performed by two separate people. One person cannot fulfill both roles.
This type of protection is not available in all states and may not be the best option for everyone. Those who work in high-risk professions, like physicians and lawyers, as well as CEOs and others with a high net worth may want to consider a DAPT in order to protect their assets. If you think this might be a good solution to help you protect your home from a lawsuit, be sure to consult with a lawyer to ensure you have all the facts before moving forward.
5. Umbrella Insurance
Umbrella insurance is extra insurance that provides protection beyond existing limits and coverages of other insurance policies. It can provide coverage for injuries, property damage, certain lawsuits, and personal liability situations. It’s generally very affordable and is used often for personal and business needs.
6. Put the Title in the “Low-Risk” Spouse’s Name
Another common tactic homeowners take to protect their home from a lawsuit is putting the title in a “low-risk” spouse’s name. Sometimes one spouse may have a high-risk level within their lifestyle, work, or business. By removing or excluding their name from the title of the home, they could better protect it in the event of a lawsuit. The effectiveness of this strategy differs from state to state. If this is an option you and your spouse may want to pursue, be sure to consult with a lawyer that understands your specific state’s laws on the method and can inform you of what might work for your circumstances.
No matter how careful you are, sometimes unfortunate events are unavoidable. When homeowners find themselves in a lawsuit, there are several options available to protect their homes. No matter what option you choose, it’s crucial that you work with a lawyer to decide your next steps. No solution works for everyone and depending on the state you live in and your specific needs, it’s important to have all the information first.
1. How to Protect Your Assets From a Lawsuit or Creditors
2. Special Ownership for Married Couples: Tenancy by the Entirety
3. Can a judgment creditor foreclose on my home?