Rising Housing Prices - A Reminder To Focus On Home Protection

 

recent front page article in the Cleveland Plain Dealer reminded me of what most of us already know – housing prices are finally rising across the country.  Your home is often one of your most valuable (or certainly one of your most important) assets.  And you should take whatever steps you reasonably can to protect it.  Rising home prices are a reminder:

·         To check your casualty and liability insurance policies to be sure that you have sufficient coverage.

·         That so called homestead exemptions may not adequately protect your home.  Homestead exemptions vary drastically from state to state.  Ohio currently has a $125,000 exemption (which essentially translates to $250,000 for a married couple).  Some states are higher; some are lower.  If your home value rises higher than the applicable state homestead exemption, you may want to consider other ways to protect it. 

Rising home prices are also a reminder that asset protection is an on-going process.  Changing times and circumstances require a periodic review of your overall asset protection plan.

 

Do Not Rely on an LLC to Protect Your Home

I am frequently asked whether placing your home in a limited liability company will protect it from your creditors.  The answer is generally no. 

An LLC will likely be ignored by a court if there is no business purpose for it.  If you own rental property, that can be held in an LLC.  In that situation your clearly have a business purpose.

Contributing your personal assets (like your home, jewelry, furniture, etc.) to an LLC will not likely protect those assets from your creditors.  If you could avoid all of your personal debts by simply contributing your assets to an LLC, everyone would do it!

Other strategies may be available to protect your home from creditors.  States like Florida and Texas have a virtually unlimited homestead exemption.  So called “equity stripping” arrangements (borrowing funds with your home as collateral and then using those funds for other purposes) may be reasonable in some circumstances.

But simply contributing your personal residence to a limited liability company in and of itself will likely offer little protection from your personal creditors.  

Ohio Raises Homestead Exemption to $125,000

Ohio House Bill 479, signed by Governor John Kasich on December 20, 2012, will raise Ohio’s homestead exemption from its current $21,625 to $125,000.  The new law amends Section 2329.66 (A)(1)(b) of the Ohio Revised Code to provide for the higher amount.

The original version of the legislation had provided for an unlimited homestead exemption.  But this provision did not survive as the bill worked its way through the legislative process.  An initial amendment dropped the exemption to $500,000 and the final version contained the $125,000 exemption.

The new exemption amount will become effective in March of 2013.

Ohio House Bill 479 Improves Asset Protection in Ohio

Ohio House Bill 479 - - commonly known as the Ohio Asset Management Modernization Act (OAMMA)  will affect a variety of asset protection strategies in Ohio.  The new law was signed by Ohio’s Governor on December 20, 2012 and will become effective in March of 2013. 

House Bill 479 authorizes legacy trusts in OhioOhio is now one of approximately 15 states that allows this kind of trust, commonly known as a domestic asset protection trust.

The new statute also increases Ohio’s homestead exemption to $125,000; regulates the use and enforceability of certain loan covenants in non-recourse commercial loan transactions; and makes other changes that will affect asset protection planning.

Ohio May Increase its Homestead Protection

In my post of May 1, 2012, I reported that there was pending legislation in Ohio (House Bill 479) that would essentially provide an unlimited homestead exemption, similar to that in Florida, Texas and several other states.

On May 22, 2012 the Ohio House of Representatives passed House Bill 479, but it had significant changes from the original version.  The original proposal was amended to provide a complete exception for the state of Ohio and all its political subdivisions.  The proposed full homestead exemption was also amended to provide a maximum exemption of $500,000 per person.  It is important to note that this is still proposed legislation.  The legislation is currently before the Ohio Senate, and there are likely to be further changes.

The Ohio Creditors' Attorney Association and others are fighting the homestead exemption and other parts of the proposed law.  There is still no assurance as to what the ultimate outcome will be.

I will continue to monitor this very significant proposed legislation.

"Homestead Exemptions" are Receiving Increasing Attention

An article by Kate Murphy in the September 2, 2010 New York Times provides a good discussion of homestead exemptions.

"Homestead exemption" can have two completely different applications.  Some states and localities use that term to refer to real estate tax breaks for senior citizens and others.  The term can also refer to the extent to which your house is shielded from creditors.  For example, Florida shields virtually all the equity in your house from most creditors.  Other states provide little or no shelter for your home.  Having your permanent residence in a state like Florida can provide great advantages from an asset protection standpoint.  I provided some detailed information on this topic in a post on June 30, 2009.

Dwight Merriam, chairman of the state and local government law section of the American Bar Association, makes an important point in the New York Times article: each state is different and anyone concerned about having the homestead exemption available to them should check carefully and perhaps engage an attorney to advise them. 

Whenever I am working with a client on asset protection matters, the client's home is generally at the center of our discussions.  So I am always glad to see homestead exemptions getting some media attention.

Joint Tenancy Not Great For Asset Protection

Holding property as joint tenants has numerous advantages.  It can be convenient, and it can generally avoid probate of the jointly held assets.  It is a big misconception, however, that joint tenancy provides very much asset protection.

A recent Ohio Court of Appeals Decision, White v. Parks is a perfect illustration of the drawbacks of joint tenancy from an asset protection standpoint.  A creditor filed a judgment lien against Robert Parks.  When Mr. Parks failed to pay the judgment, the creditor filed a foreclosure action against his residence, naming both him and his wife (the co-owners), even though the judgment was only against Robert Parks and not his wife.  The trial court ruled that even though Mrs. Parks was not subject to the judgment, the residence nevertheless had to be sold.  Mrs. Parks was to get half of the net equity after the sale and the creditor would receive the other half.  The Ohio Court of Appeals, Ninth District, affirmed the ruling of the trial court.

From the Parks' standpoint it was a lot better that their house was in joint name than in Mr. Park's name alone.  The joint tenancy provided some protection.  However, even though title was held jointly, the couple was forced out of their house.  In addition, the creditor got one half of the net equity.  Not a great result for this couple.

Holding certain assets as joint tenants (such as a checking account with relatively limited funds) often makes great sense, simply for convenience.  Advantages of joint tenancy may out-weigh the disadvantages for certain parties.  When deciding whether to hold assets jointly, the assets cannot be looked at in isolation.  How best to title your assets will depend on a wide variety of factors, including your occupation, marital status, income, net worth, asset mix and many other considerations.  Titling an asset one way could be good for one purpose and not for another.  You should not assume, however, that jointly held property will provide great protection from any of your creditors.

Protecting Your Home from Creditors -- Huge Variations in State Laws

A debtor’s personal residence is a natural target of his or her creditors. Some states (Florida, in particular) provide special protection for your home against claims of creditors. Currently, Florida’s protection is so strong that some debtors have re-located to Florida solely to take advantage of this protection. Texas also provides a very strong homestead exemption. Ohio, however, currently provides little statutory protection. Until very recently, the Ohio homestead exemption was only $5,000 -- one of the lowest in the country.  The exemption was recently raised to $20,200 (Ohio Revised Code Section 2329.66).  Furthermore, Ohio law does not permit residents of Ohio to utilize the federal bankruptcy exemption, which would be a higher amount. Even in bankruptcy, therefore, Ohio residents have only a $20,200 homestead exemption. There are huge variations in state homestead exemptions.   Texas and Florida are essentially unlimited; Nevada is currently $550,000. Other states -- like Ohio -- offer very limited exemptions.  

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 has significantly curtailed the previous ability to move from state to state to take advantage of a better homestead exemption. Essentially, the federal law provides that the state homestead exemption is limited to $125,000 if the debtor moved within 3 years and 4 months of the bankruptcy and in certain other limited circumstances. This limitation applies only in bankruptcy, however, and not to a creditor’s action outside of bankruptcy.

In several states, debtors may benefit from re-titling their residence as “tenants by the entireties.” Ohio, however, does not currently recognize this form of home ownership. While “joint” ownership is sometimes used to avoid probate, it is not helpful from an asset protection standpoint. Creditors of either joint tenant may be able to reach the entire property to satisfy debts of the joint tenant.

In light of the fact that Ohio provides such a low statutory homestead exemption, we look at alternative means of protection for our Ohio clients. We can sometimes gain some protection for clients through certain trusts. Not all trusts provide creditor protection. Certain trusts, however, may provide some protection for a residence. We also frequently advise re-titling the house in the name of the spouse who is least likely to face future litigation.

Issues relating to your personal residence cannot be analyzed in isolation. They should always be considered in connection with an over-all asset protection strategy.