|
For more information
scroll down to the bottom or click here! |
Equity Stripping
Is “Equity Stripping” the Best Way to Protect Your Asset?
(Proper Execution Is Crucial!)
There is rampant misinformation that permeates
our industry. For example, you will see companies attempt to provide
information on how to equity strip your current assets or operating
company. We do come across some information that is better than
others. Our goal is to point out distinctions that no ones does.
Here is an example of suggestions on how to equity strip assets,
which we ran across. Our comments are made in capital letters.
You will read why we go the extra step. The article begins…
Promising In Theory… Uncertain in Execution
Simple in Plan… Difficult in Implementation!
Introduction
Equity-stripping is perhaps the best technique
available to protect real property from creditors. The theory
behind equity-stripping is, very simply, that if you don't own
any interest in the property (i.e., the equity is "stripped" out) there is nothing for a creditor to get, and so therefore
a creditor will not spend the time and money to attempt to execute
on the property.
Is there a Better Approach? One way to find out!
Call NCP Today at
1-800-351-5111 and
Let Our Vast Network of Professionals Help You!
As with most asset protection techniques, equity
stripping works best when it is done in a "quiet period" in advance of any creditor claims (i.e., the transaction
is "old and cold" by the time the creditor comes knocking
at the door). However, there are some ways -- albeit with more
expense and risk -- to make this work in the face of creditor
attack.
Spousal Stripping
This is the most common technique; it is also
the worst. Here, you simply quit-claim over to your spouse your
interest in the property.
Advantage: Cheapest
way to do this.
Disadvantage: Most
creditor attorneys are knowledgeable of this technique, and
look for it.
Disadvantage: You
spouse may divorce you, leaving you with no interest.
Disadvantage: A
court may consider this to be a fraudulent transfer and just
ignore it.
A letter we received which illustrates the pitfalls
of spousal stripping:
Can you give me a little advice?
A quitclaim deed was signed, signing the house
over to my wife to avoid a support lien. Now we are divorcing
and she wants me out of HER house.
I would rather have a lien on the house than
have no house but I don't want to go to jail for signing the
house to her to avoid the support lien.
Thank you.
[name withheld to protect privacy of correspondent]
Uncontrolled Bank Stripping
Taking a (first or second) loan from a bank
is the easiest and most common way to equity-strip property.
You now have the cash, which being liquid is much easier to
protect from creditors than real property, and when the cash
is invested it will hopefully grow at a rate higher than your
mortgage interest and associated mortgage costs.
Advantages:
- You can get a home-mortgage deduction.
- Not likely to be considered a fraudulent transfer,
if the bank has no notice of any pending claims or judgments
against you and no lien has been filed against the property.
- Creditor has to ponder whether or not any equity
will be left over from liquidation of the property, since the
creditor is second in line and will not receive a cent until
the first mortgage is paid off and all expenses of liquidation
and sale are paid.
Disadvantages
- You essentially surrender control to the bank.
If you don't make payments to the bank on the note (keeping
in mind that you will probably be denying to a creditor that
you are liquid), they bank will foreclose whether or not you
desire foreclosure.
- The bank probably will probably only give you
a loan for 80% of your equity (since the bank will be concerned
about fluctuations in property value and liquidation costs),
so you will probably leave 20% unprotected. If the creditor
forces liquidation, you will lose this unprotected equity and
any appreciated value.
- If your liquid cash derived from the loan does
not grow faster than your mortgage rate plus costs, then economically
you will be a net loser.
NCP NOTE – MOST REAL ESTATE HAS LOANS – CONTROL IS RETAINED BY UTILIZING THE FUNDS LOANED TO BE IN A
POSITION TO MAKE THE LOAN PAYMENTS; WITH RESPECT TO THE 20%
UNPROTECTED, THIS CAN BE OVERCOME AND CERTAINLY IS BETTER THAN
BEING 100% UNPROTECTED
Controlled Bank Stripping
The best way to equity-strip property is use
a controlled entity to fund or back the bank's loan.
Advantages:
- You can get a home-mortgage deduction.
- You indirectly maintain complete control on
whether the property will be sold to satisfy the mortgage.
- Since you are backing the loan, you can structure
the loan on default so that it "balloons" to effectively
eat up the rest of your equity and any appreciated value of
the property, and thus protect that value too.
- If performed correctly, Creditor sees only
loan to bank. Creditor sees that there will be no moneys remaining
after liquidation, so unless the Creditor is just plain stupid
or spiteful will not even pursue a sale of the property.
- Since the liquid assets derived from the loan
are backing the loan, you are not subject to market whims.
Disadvantages:
- It is more costly to set up this backing arrangement.
NCP NOTE - BACKING ARRANGEMENTS ARE MEANT TO
INFUSE A THIRD PARTY, IE THE BANK INTO 100% EQUITY STRIPPING
RATHER THAN HAVING THE BANK DO A TYPICAL 80% LOAN. FOR INSTANCE
IF YOU BACKED A $100,000 LOAN WITH A $100,000 SHORT TERM CD
ISSUED BY THE SAME BANK, EFFECTIVELY THE SPREAD WOULD TYPICALLY
BE AROUND 3%, OR IN ESSENCE A $3000 PREMIUM IS BEING PAID TO
RECEIVE THE LAST 20% LEVERAGE, BY WAY OF A BACKING ARRANGEMENT,
AS OPPOSED TO YOUR ACCOMPLISHING EQUITY STRIPPING BY ANOTHER
ENTITY YOU CONTROL. $3,000 YEARLY COST TO OBTAIN AN ADDITIONAL
$20,000 IN LOAN FUNDS IS AN INTEREST RATE OF 15%.
Cross-Collateralization
This is a technique involving the use of controlled
corporations. Essentially it works this way: Assume you own
Corporation A and Corporation B, and both corporations own property.
You cause Corporation A to take a loan from Corporation B, which
loan is secured by Corporation A's property. You then use the
loan proceeds to give a loan back to Corporation B, which gives
Corporation A a lien on Corporation B's property. Thus, without
any money going outside the economic family, the property of
both Corporation A and Corporation B have been liened and are
protected from creditors, at least to the extent that the creditors
can't figure this out or come up with a claim that the transactions
were without economic meaning and were fraudulent transfers.
Thus, if Corporation A has a creditor, and the creditor has
not figured our that Corporation B is part of the same economic
family, then Corporation A's property is sold, and the proceeds
transferred to Corporation B in satisfaction of the loan, thus
leaving the creditor holding an unenforceable judgment.
The above example is pretty transparent and
would probably be deemed a fraudulent transfer if a creditor
figured it out. It illustrates, however, how cross-collateralization
techniques can operate. Assume, in the above example, that there
were three or four corporations, some of which are offshore,
and several trusts and private foundations to hold the property
-- and that the transactions had some real economic substance
within the client's business. In such case, it might be very,
very difficult for a creditor to get the complete picture, or
to go further and prove that the transactions were without substance
and amounted to a fraudulent conveyance.
For very sophisticated individuals and businesses,
however, these cross-collateralization techniques can effectively
protect an unlimited amount of property.
COMPLICATIONS ASIDE, AN LLC IS NORMALLY A MUCH
BETTER ENTITY TO HOLD REAL PROPERTY FOR TWO REASONS: 1) THERE
IS THE LIMITED ASSET PROTECTION ACCORDED YOU AS A MEMBER IF
A JUDGMENT IS OBTAINED AGAINST YOU PERSONALLY, AND 2) THE SALE
OF APPRECIATED PROPERTY BY A C CORPORATION INVOLVES DOUBLE TAXATION.
|
How to Keep Your Business in the Top 5%!