Black & LoBello

As we enter the second year of widespread foreclosures and short sales in Clark County, we are just starting to figure out how the banks will behave.  Many are unaware that they can take proactive steps to minimize both the possibility and effects of when lenders pursue a deficiency action.

As always, the best defense is a good offense.  The best option available to those with assets is to engage in a preemptive strike: asset protection.  Several strategies can be used to properly protect properties, investments, and savings.

First and foremost, take advantage of state and federal exemption laws.  Homesteads in Nevada are protected up to $550,000 worth of equity in a primary residence with a proper homestead designation.  Other exemptions can be applied to funds in ERISA qualified plans and some of the cash values held in life insurance policies.  This means, if you are sued or have a judgment against you, assets or equity held in exempt resources cannot be collected.

Next, a proper structure using business entities can be used to remove assets from your personal name and place them in the name of the business.  This offers two types of protection; shielding a business from claims of its owners’ creditors and an owner’s assets from the claims of business creditors.  In certain circumstances, business owners may also see tax benefits from proper business formation.

Take, for example, Ann and Tom.  Ann and Tom have a house worth $400,000 that they paid cash for, and own a sole proprietorship business with cash accounts of around $50,000.  Ann manages their business while Tom works as a pharmacist.   They each have $50,000 in their 401(K)s and have about $10,000 worth of cash value in whole life insurance.  They have three children, all under the age of 18.  Unfortunately, they also own a rental property worth about $200,000 less than what they paid.  They both signed on the loan.  Ann and Tom also have about $100,000 in savings in their joint savings account.   They are up to date on all of their mortgage payments but are thinking of a possible strategic default on the underwater investment property.

What can Ann and Tom do to protect their assets (home, 401(K)s, cash value, business assets) from potential claims if they default on their investment property?

There are many possible solutions for every situation. Here are some possible recommendations for Ann and Tom:

• File a Declaration of Homestead for their primary residence. This quick, inexpensive method may protect all of the equity in their home and involves only a trip to the Recorder’s office and approximately $20.00 in recording fees.
• Take advantage of state and federal deductions.
  • As long as their 401(K)s are ERISA qualified, all of the funds are protected from any judgment rendered against them.
  • Additionally, Nevada offers protection to Ann and Tom’s life insurance benefits as long as the annual premiums on the policy do not exceed $15,000.
  • They may want to take some of their savings and put it into 529 plans to save for their children’s education, which have various tax and asset protection advantages.
• Set up a proper business structure.
  • A sole proprietorship offers little or no asset protection for the owners of the business or the business assets.  A better strategy is to form a Nevada limited liability company.  This provides protection of the business’s assets from Ann and Tom’s creditors.  Also, if the business itself is sued, Ann and Tom’s assets may be protected as well.
  • Tom may also want to form a separate company for his pharmacy practice since that particular profession has a high risk of being sued.
• Pursue negotiations with the bank.
  • Ann and Tom might try to negotiate a loan modification with the bank or work out a short sale.  However, if they do not engage in proper planning before submitting their financial statement to the lender, the outcome could be less than ideal.
  • Again, proper structuring is important.  A short sale has many advantages over a foreclosure and Ann and Tom should sit down with a qualified attorney before deciding which courses of action to take.

Tiffany N. Ballenger, Esq.