In the last edition, I wrote an article outlining the basics of Nevada homestead laws.  We are fortunate to have a very generous statute which protects up to $550,000 of equity in your primary residence.

What if you or your client has over $550,000 of equity in their home now?  Can you protect it? Yes.  

There is also a hidden danger of which most people aren’t aware.  Over the course of time, as property values rise and your mortgage gets paid down, your equity could creep up to the point that your home could eventually be liened and sold against your will.  

Is there anything you can do now to ensure that your home can remain your home as long as you choose to live there?  That one can ever take your home from you?  Absolutely.

Limitations of Living Trusts.  

Revocable living trusts are wonderful vehicles to avoid probate, avoid will contests after you are gone, and can be used to provide your beneficiaries with complete asset protection throughout their lives on everything they inherit from you.

What your living trust won’t do is protect your assets during your life.  Fortunately, there is a trust which can – the Nevada Asset Protection Trust (NAPT).

Can’t I Protect My Home with a Limited-liability Company (LLC)?

No. Not without incurring unnecessary income tax liabilities every year for as long as you live in your home.  Why is that?  

In order for your LLC to provide asset protection, it must be treated as an independent entity, separate and district from you.  If you create an LLC to own your home and don’t pay the LLC any rent, you are not treating it as an independent entity.  You open the door for a creditor to attach your home under an “alter ego” theory.  Worse yet, you cannot claim a homestead exemption because you no longer own your home – your LLC does.

So what if you choose to treat your LLC as an independent entity and pay rent?  Any problems there?  Big ones.  

First of all, you’d need to pay the full fair market rental value for the home, or you would not be treating it as an independent, arms-length transaction.

Is rent deductible by you? No. 

Is rent reportable by you as the owner of the LLC?  Yes.

So what you will have accomplished is to create unnecessary taxable income for yourself each and every year for as long as you own your home.  Not a good move.  But all is not lost.  

Is there any way that you can protect your home?  Yes.

Nevada Asset Protection Trusts (NAPT).

We are fortunate to have the safest, strongest, and by all independent accounts, the best asset protection trust in the nation.  They are easy to set up and easy to administer.

How do they work?

Under Nevada law, you can be the trustee and the beneficiary of your trust.  You can create your own NAPT and hold your home and all other assets that you’d like to protect in your trust.  By statute, the asset protection benefits kick in after your assets have been held in your trust for two years.

As the trustee of your trust, you have complete control over selling, buying, and reinvesting your assets.  You also have the ability to distribute them to yourself or any other beneficiary whenever you like.  No creditors can attach any assets held in trust or any distributions from your trust.

The bottom line is that Nevada offers you the ability to create your own NAPT, hold your valuable assets within the trust, and after two years, be 100% protected for the rest of your life. 

Your NAPT can be set up as a “grantor” trust, meaning that there are no tax consequences on contributing your home or other valuable assets, properties, or investments into your trust.  It also means that no separate tax return is required for your trust.  You report all income and losses on your individual income tax return the same as if the trust didn’t exist.

You still retain all of the income tax benefits of home ownership, such as deducting interest on your mortgage and property taxes.  You also retain your $250,000 per person capital gains exclusion for the sale of your primary residence.

In short, Nevada permits each of us to, in essence, have unlimited protection of our homes for life without any downside or limitations.  What’s more, we can even use our NAPTs to protect all of our other valuable assets.  The protection is not limited to just our homes.  It simply doesn’t get any better than that!