Asset protection is no longer "just for the rich". It is simply a necessity for anyone who has even moderate assets: One of the major concerns people have is how to protect their home which is their most valuable asset. Many times the fear of losing your home, is enough to force a legal settlement even if the lawsuit has no merit or is not even legitimate. Lawyers know this and many lawsuits are filled in this country just because the lawyers know that they can get a settlement. They know that the fear of losing one's home or other assets will bring the defendant to the settlement table.

Although the family home is a reasonably Safe Asset, with liability generally covered by insurance, because of tax issues it is extremely important how the family home is handled: The first problem concerns the availability of the income tax deduction for home mortgage interest. Section 163 of the Internal Revenue Code permits a deduction for "qualified residence interest." A "qualified residence" is defined as the "principal residence" of the taxpayer. The only requirements appear to be that (1) the house is the principal residence of the taxpayer; (2) interest is paid by the taxpayer; and (3) the taxpayer has a beneficial interest in any entity that holds legal title to the property. Based upon the language of the statute, the deduction for mortgage interest would, therefore, not seem to be adversely affected by a transfer into a Corporation, or a Limited Partnership. However, until the law on this issue has been conclusively decided you should not risk the consequences of a disallowance of your mortgage interest deduction.

Secondly, under IRS Code Section 121, only an individual or a grantor trust would be entitled to qualify for an exemption of $250,000 ($500,000 if married) from the sale of a personal residence. If a personal residence is transferred to a Corporation or Limited Partnership or Family Limited Partnership then this Tax benefit will be lost, see below: The 5 Biggest mistakes made in Asset Protection.

However, if the Residence is transferred to a "investment holding company LLC" taxed as an LLC Disregarded Entity the Tax benefit is maintained. Under Treasury Reg. 301.7701-3 the default "tax status" of a single member LLC is: "Disregarded as an entity separate from its owner". This single member LLC would be completely disregarded for tax purposes and the individual (or living trust) member will be taxed as if he or she had never transferred the asset. In this situation the one member would be either the less risky spouse, or a Living Trust.

This situation is ideal since it allows you to have the best of both worlds: You can deduct mortgage interest, qualify for the $250,000 exemption ($500,000 if married) and have charging order protection against creditor claims.

When it comes to your homeowners' insurance, you will be able to maintain your policy "as is" because you have an "insurable interest" as the member of the LLC. Ideally you would add the LLC as an "additional insured" on the policy.

Asset Protection Explained: It should be noted that the primary goal of asset protection, is not to forego paying legitimate creditors. To the contrary, good asset protection planning assumes to a high degree, that the target of the litigation (often referred to as the “debtor” even if the claim has not yet been litigated, or ordered as judgment by the court) will pay all just debts, and not attempt to use the basis of the asset protection planning to unfair advantage.

The main goal of asset protection planning is to segregate, and insulate liabilities away from valuable assets, to the maximum possible and allowed by applicable law, so as to reduce the debtor’s profile and amenability to lawsuit, as well as to conduct a lawful “asset freeze” by shifting valuable assets to other family members (in trust or otherwise) at a time when the debtor has no existing or foreseeable claims.

Planning for asset protection is to a significant degree, pre-litigation and pre-bankruptcy preparation which seeks to maximize the use of state and federal acknowledged exemptions, which are granted by each states, and federal legislatures, as well as other techniques of protecting assets as recognized by established. or anticipated law.

As a word of caution and a bit of pro bono legal advice, one should not use asset protection preparation to cheat legitimate creditors, ex-spouses, business partners, and/or investors, etc., and in past performance of the courts, anyone who attempts to use asset protection for such behavior, can expect very liberal pro-creditor rulings.