Protecting Your Crown Jewel Asset—Your Home—From Creditors

You may scoff at the notion of needing wealth preservation, but you should take a closer look at the value of the equity in your home. The value of real estate in California has been on the rise with the median value of a home well exceeding $700,000. If the home you own happens to be in Orange County, you possess an asset that could sell for more than $900,000 in today’s market. Add the value of other assets you own to the value of your home and wealth preservation suddenly makes sense. Factor in age and a future inability to make up for any loss, and it is imperative.

Taking steps to protect your home is something you need to do now. Waiting until there is a lawsuit or a claim by creditors is too late to begin to develop a strategy to protect it. Here are a few suggestions to discuss during a consultation with an attorney at NM Law.

Homestead Exemption

Most states have laws protecting homeowners against claims by creditors. A homestead exemption prevents the forced sale of a property used primarily as your principal residence. It does not apply to investment properties, second homes, or vacation properties.

Because each state has its own version of a homestead exemption that applies to real property situated within it, the scope of the protection provided to homeowners varies. The general purpose of the exemption is to protect at least a portion of the equity a homeowner has in a primary residence against claims by creditors. 

Most states place limits on the amount of equity protected by the exemption. A few, including Texas and Florida, do not impose limits on the protection afforded a primary residence under their homestead exemption laws. 

Limits on how much equity can be protected through a homestead exemption mean that some homeowners could lose their homes to a forced sale by creditors. This could happen when the market value of a home exceeds the equity protected by the homestead exemption. The homeowner retains the protected equity, but the remainder of the proceeds realized in the sale of the property goes toward the satisfaction of creditor claims.

Homestead Exemption in California

A new homestead exemption law went into effect earlier this year in California. The homestead exemption now ranges from $300,000 to as much as $600,000. The law uses the annual median price for single-family homes of the county where the property is located to calculate the amount of the homestead exemption. Starting in 2022, homestead exemptions will undergo annual adjustments for inflation based on changes in the Consumer Price Index as published by the California Department of Industrial Relations.

Given the high median values in the state, the equity in your home may not be fully protected by the homestead exemption. A home in Orange County at the low end of the current market that qualifies for the maximum homestead exemption of $600,000 may not be protected against a forced sale by creditors unless your equity is low. Certain types of trusts may offer homeowners another option for protecting their primary residence. Consideration of such protective measures may be essential for those whose net worth is tied up in their real estate. 

Use a Special Trust to Protect the Equity in Your Family Home

A special trust designed to protect your home may be the best solution against aggressive litigants and creditors. Transferring title in your home to a land trust or into an irrevocable trust surrenders ownership of the home, but it allows you to continue to use the property and pass it on to your heirs according to the terms included in the trust by your lawyer after consulting with you.  

The transfer places the asset out of the reach of future creditors only if it is done in compliance with the law. The transfer of ownership of your home with the intent to place it out of the reach of someone to whom you already owe a debt or when you are in the midst of litigation would be a fraudulent transfer in violation of California law. 

Act Now to Protect Your Home

Anything you do to protect your home or other assets needs to be done before problems arise when it may be too late to legally do so. A consultation with an attorney at NM Law provides information about the homestead exemption and options that may be available to you for preserving assets and estate planning. Contact them today to schedule a consultation by calling 949-253-0000.

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